Labour and the perversity of “means testing”
There is an element of the Winter Fuel Allowance (WFA) decision over pensioners that is being missed, and it is increasingly coming out perversely in a Labour narrative that the WFA is not a good way of delivering help to the needy. The worst of the tabloid press and social media have seized false narrative, and turned into a perverse attack on universal benefits. Those who do so either do not understand what they write, or do not care.
This argument against universal benefits has now taken a turn for the worse, and is is being made and exploited as a Labour narrative, that the way to pay benefits is by “means testing”. This is the real purpose of the WFA withdrawal – it is the preliminary to the end of universal benefits. The anger within Labour may in part be an instinctive but as yet unarticulated sense that the end of universal benefits is the plan. All tax is imprecise at the margin. Fair tax require to be progressive, and fairness is applied best through the taxation of income; those who earn more, pay more. This is an unchallengeable principle of taxation.
Taxation is general; it is not in practical terms, possible for Government to apply tax in a way that is custom fit for every single individual taxpayer’s circumstances. There will always be anomalies at the margin. A fair tax system does not choose to penalise or punish the individual taxpayer caught adversely at the margin (faced, for example with falling into poverty because of a general rise in the rate of tax, or personal allowance). Perversely, Government can throw people into poverty by doing nothing. The effect of Government doing nothing about tax rates or allowances during a period of inflation creates an anomaly called ‘fiscal drag’; it means that taxpayers are dragged into paying more tax, with Government doing nothing. At the margin this can push taxpayers into poverty, by paying more tax without having earned any additional income.
The way Government fairly handles the marginal or anomalous circumstances arising from general taxation is to address it through the benefit system. Universal benefits (benefits paid to everyone) work for government and recipient best because they are by far the cheapest real world way for government directly to provide help where it is needed, to the people who need it. It does not require a large, expensive and often inefficient bureaucracy. It is also the only kind of help the needy (often employed, and taxpayers), that securely treats everyone with equal respect, and not as supplicants. Everyone who needs the help will receive it, some ‘at the margin’ of need will receive it; and for everyone else who receives it but doesn’t need it; this is offset automatically by a proper progressive income tax system, which is supposed already to be set up to balance the equity of the system. I will explain this below.
Government knows very well that many proud old people will resist being treated as supplicants late in life, and claim means tested benefits. Government knows not all will apply. Government also knows that not all who would apply if they could will apply, because they will be defeated by the complexity of the bureaucracy (including the elderly, probably not internet savvy), or have nobody to help them apply. Means testing is a scheme that can only fail. It is expensive to operate (it needs close bureaucratic oversight at very high cost, and is typically inaccurate). It does not guarantee to reach those who need it. The only advantage to government is “if” the money it saves by failing to give it to those who need it, is more than the high cost of means testing (there is no guarantee of this, and often the anomaly leads to more people falling into poverty or under stress, requiring help from health or social services, creating yet more cost).
That Labour should operate this policy is grotesque. They can only do it because they intend to make means testing the common currency of paying benefits in the longer term. And that is a recipe for spendthrift, wasteful and total failure. And so the merry-go-round goes on. The only beneficiary of this idiocy is Neoliberalism and its vested interests; the paymasters of both Conservative and Labour.
Allow me not to return to explain how a progressive tax system is designed to cover the anomalies, and how means testing is destructive, costly and makes the problems worse. The theory of taxes on income is that they are progressive, those who earn more pay more. A progressive tax system should cover all the marginal anomalies, like people in receipt of a universal benefit like WFA they “do not need” in the current jargon. Income tax rate should be set to incorporate such anomalies, ensuring the rate is at a level to claw back the un-needed benefit; it will do this automatically, at little cost, if properly implemented. That is what “progressive” taxation of those with more income is designed to accomplish.
The Personal Allowance (PA) is another option available with the same effect. So let us look at how that works. The PA hasn’t changed since 2021. This lack of change during a period of high inflation has a ‘fiscal drag’ effect, but for those taxpayers who are not “in need” of WFA what this means is that for four years the silent effect of a static PA means that they are in effect paying more tax because they have not had the PA adjusted for inflation. I carried out a rough calculation of the marginal impact; inflation over the four years has on one simple measure I applied, over four years 2021-2024 was around 20%. If inflation on this measure had been applied by Government to PA, then the tax payable would have been, for illustration around £450 lower. This alone is more than the WFA benefit received, of around £300, even if tax adjusted. Electricity prices, however do follow real changes in inflation. Domestic energy prices have risen dramatically. Therefore I think we can say the Government position on “means testing” is unsustainable; and it is ruthlessly cynical for anyone to claim that such a system is not seriously penal and unjust in its effects.
I accept that my estimates are ‘back of an envelope’ and stand to be corrected; but I think the principle of the argument, if not the detail, is sound.
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Totally agree.
I agree – and ‘perversity’ is exactly the right word: the underlying fact is that keeping people in poverty is enormously expensive. In hard financial terms, it hugely increases expenditure on health care, social services, the criminal justice system and so on. The damage and human cost of poverty and injustice to individuals, families, communities and broader society is incalculable but all too readily apparent.
Absolutely I agree with this – it hadnt occurred to me to think that winter fuel was being used like a trojan horse. Its so important to return to basic principles – in this case universality – and to highlight what it means. Acceptance and a common experience, not singling out a particular group when there will always be people on the margins who lose out.
The research evidence for universalism has been in for years.
See:
The Case for Universalism: An assessment of the evidence on the effectiveness and efficiency of the universal welfare state
The Jimmie Reid Foundation 2012
https://reidfoundation.scot/portfolio-2/the-case-for-universalism-an-assessment-of-the-evidence-on-the-effectiveness-and-efficiency-of-the-universal-welfare-state/
Universal benefits work. They work now They worked fifty years ago. The problem is that a 2012 Jimmy Reid Foundation paper wouldn’t have been required to be explained to the Labour Party then (WFA was introduced as a universal benefit by Gordon Brown in 1997). Clearly nobody is reading it in Labour now. In 2024 it is a Labour Government implementing “means testing”; and as Cathie Lloyd observed above; it is a Trojan horse. We will see means testing being wheeled out more often in future, because with the WFA withdrawal, insidiously the poison has been dripped into the public’s ear; it is now Labour conventional wisdom to claim that “means testing” is a fair basis for operating the benefit system.
Yes, I agree entirely too.
The attack is on the principle of universalism and, as a consequence, the return of the false dichotomy of ‘the deserving and the undeserving poor’. Indeed, in his uninspiring, wilfully vague and poorly delivered speech to the Labour Party Conference, he announced, in his cliched way, a ‘crackdown’ on those not in work who were, by implication, ‘benefit scroungers’ – the ‘undeserving poor’.
I have been in receipt of the Winter Fuel Allowance since it’s inception. For the past 50 years I have been a higher rate taxpayer, so, by any reasonable measure, I do not need the WFA. On every occasion I have donated it to charity and had the charity claim ‘gift aid’. Unlike my pensions – both state and private – which are part of my income and, therefore, subject to income tax, the WFA, being an ‘allowance’ was not subject to tax. By declaring it to be taxable, some of the money allocated to WFA would be ‘recovered’, and, for higher rate taxpayers, we would pay more tax on it.
The Prime Minister and the Chancellor could have done this rather than their mendacious story, presented without evidence, that removing the WFA was necessary ‘to stop the economy from crashing’. BOLLOCKS!
The WFA lie, is a to divert attention from Labour’s malign intention of ending the principle of universality.
Starmer makes much of reprising a circumlocution of George Osborne’s cynically mendacious, ‘we’re all in it together’, and with the same intention.
We are, indeed, ‘all in it together’. That is what community is. That is why we pay taxes and national insurance. They are for the common good. The statue of blindfolded Justice on the top of the Old Bailey, is a symbol that the law applies to us all and is a protection for all. It is about rights we have as individuals.
Starmer is, we are told, a strong believer in human rights. But he has signally failed to argue for the withdrawal of the WFA in terms of rights.
I pretty much agree; we covered this in social policy class. Means testing benefits is very inefficient. Much better to pay universal benefits and claw some notional ‘overpayment’ back through progressive tax. Justice is to be achieved at a social level, with an adequate safety margin for individuals so they don’t fall into destitution through systematic flows (after a string of bad luck, say).
What I would add is: look at the other side of the coin. Paying tax is usually easy enough for lower income people, frictionless through VAT and PAYE. If paying tax was made as easy for the rich, they wouldn’t have to employ accountants and financial advisers, whose role (if the rich did still employ them) would be more obviously to avoid (and evade) tax, inviting special scrutiny.
If the British imperial state was serious about optimising tax, it would close down its tax havens, throw some crooked accountants in jail along with rich tax dodgers, and largely automate tax collection for the rich using transparent measures. Culturally, it makes sense to make it a high status thing to pay high taxes. If it’s patriotic to toot about laying one’s life down for one’s country, the least that patriots can do is pay their full tax duty. The extra transparency will help fight other forms of corruption too. Since the rich (collectively) extract wealth rather than create it, their threats to flee the country to some other host jurisdiction should be welcomed (after their assets are frozen pending tax investigations, one assumes).
Until capitalism falls, of course.
All very interesting, but when Universal benefits were first introduced by the post 45 Atlee govt most men died before the age of 67 and hence claimed no pension never mind WFT..
The average family back in those days had 3.5 children per household, now it’s less than 1.5, put simply the ‘indigenous’ population of the UK is slowly disappearing, hence to keep the economy going the country needs immigration
In another 20 years over a third of the population will be 65 and over, who’s going to look after/care for them?
Unless we (actually women) start breeding again we’re knackered.
Demographics is destiny.
For the first time in recorded history there were more deaths in Scotland last year than births, if this continues Scotland (and for that matter the whole of the so called advanced nations) will be dysfunctional within the next 2 generations.
Yes, Scotland has a very serious demographic crisis. The fertility rate in Scotland is 1.3 births per woman. The replacement rate is 2.1 births per woman. You do the maths. The problem is, this is not fixed by arguing birth and death rate as the core issue fixing WFA withdrawal.
There is currently a two-child cap on benefits. Even the IFS has noticed that poverty has increased for three child (3/3+) families. It doesn’t work, and it means we have an incompetent population shrinking tax policy (The Chinese did this, on steroids; they are now doing the opposite, having induced their own population decline problem). This is not the way to increase the birthrate, but tax policy encouraging larger families is more relevant to fixing the demography crisis, along with relaxation of immigration (a Brexit induced disaster); than arguing over universal benefits.
Partly correct, but immigration has gone up since Brexit, it’s just that Eastern Europeans have been replaced by people from further afield. Net legal immigration last year was 650,000. That’s the city of Glasgow/Leeds coming every year.
As we’re no longer breeding we need immigration. This is the greatest problem we face and yet not a single politician of either left or right has the courage to address the issue.
20 years ago under Blair, Frank Field was told to go and think the unthinkable and when he did was sacked.
For better or for worse the indigenous people’s of the UK are slowly dying out and been replaced. Nothing we can do about it, demographics is destiny.
You are quoting figures of immigration to the UK, not Scotland. UK immigration policy is a mess. The problem remains Brexit. But you still keep trying to make this about immigration.
This thread is about the WFA and universal benefits. It is quite simply the wrong thread for the debate you want.
Maybe, but very soon when a third of the population are no longer of working age who’s going to pay for pensions/universal benefits/WFA?
Any ideas? Leave you in peace and all the best.
“Any ideas? Leave you in peace”.
There is a contradictory invitation to go round in an endless circle. This is my third polite response to your comments, so to finish this debate (please):
1. Stopping WFA doesn’t fix the demography problem. It makes old people poor., and life more difficult. The population doesn’t increase.
2. I did make a point, (implying an idea) about tax. You ignored it.
3. You offered no ideas, and no solution to your own problem and said nothing relevant to address the subject of the blog and this thread.
4. There is an acute demographic problem in Scotland. It will have to be fixed, but it is a world problem, including China. Cutting the costs of benefits and pointing out the economic malaise accompanying a falling population does not fix either the economic problem or the demographic problem. As long as Britain has its current, disturbed attitudes to immigration and is in denial that Brexit is a disaster, this population will never be fixed. This is slowly and relentlessly killing Scotland. But pointing to the cost of WFA just does not grasp the scale or nature of the political problem; a crisis of British exceptionalism.
Thank you and good night.
Excellent clear articulation of a sound principle.
Labour are now defending the means testing of WFP in contradictory ways:
1)The economy would have crashed if we hadn’t done this. (bizarre)
2)We will encourage a greater uptake of pension credits (which will negate any savings).
I think that strategists in Labour Party thought this policy would be popular with younger voters as they could turn it into an inter generational fight against those wealthy pensioners.
Turns out most younger voters are not that cynical and have parents and grandparents they care about.
They deserve to reap what they sow with this nasty policy.