Who Has Our Children?

The Major's very bad dream

Following yesterday's blog on the problem of bad parents, we've taken another look at who is actually having Britain's children.

The Major is constantly telling us (eg see here) that the welfare state has produced far too many children at the bottom of the heap. He reckons that by paying the poor and feckless to have children we've given ourselves a monstrous problem. Generation upon generation of feckless no-hopers, reproducing like Fibonacci's rabbits, and threatening to undermine a billion years of Darwinian progress.

And while the Major does tend to put things somewhat bluntly, round our way that is a very widely shared view.

The trouble is - as we saw here - actual facts are very thin on the ground.

But we've now taken a closer look at the latest Office for National Statistics data on income distribution across households of different types (see here). And we've extracted the number of children in households according to their income level.

Across the whole country there are 12.9 million dependent children spread across 19.1m non-retired households, an average of 0.67 children per household. But when you look at the distribution of children across each household income level, you find that households in the bottom 20% of incomes have an average of 1.03 children, while those in the top 20% have an average of 0.34.

What that means is that the poorest 20% of (non-retired) households have over 30% of Britain's children. Whereas the richest 20% only have 10% of the children. That is a pretty striking contrast - our economically least successful households have nearly one-third of our children.

Here's the complete picture (note - 20% income bands are known as quintiles):

And to put some more flesh on this, the gross income of the bottom 20% of households before taking account of welfare benefits averages just �7600 pa. Cash welfare benefits add a further �6300 pa.

So what should we make of this? Is the Major right?

Well, it's clearly the case that the poor have considerably more children in their households than the rich. Yes, some of that is because the rich tend to be a bit older, and their kids may have flown the nest. But even if we restrict the comparison just to households with children, those at the bottom have an average of 2 children, whereas those at the top top have just 1.5.

And it's also true that welfare constitutes a big chunk of household income for the poor - getting on for half their average gross income.

But does that mean it's welfare that's delivered all those poor kids?

In an age of readily available contraception where child labour has long since been abolished, simple economics suggests that the poor should have fewer children than those with higher incomes. That's surely straightforward.

And it's also straightforward that paying welfare based on a household's number of children, must increase the attraction of having children.

But does that prove the Major's right?

What if the poor comprise a whole bunch of people who are incapable of thinking and behaving according to economic rationality? It must be said none of us are always great at doing that.

What if we cut child welfare payments only to find ourselves with just as many poor kids, only now they're starving?

Well, it could happen - we can never answer these questions ahead of time, and in the abstract anything is possible.

But Tyler has seen enough to know there's a serious problem with our current welfare system. Nobody wants children starving in gutters, but it can't make sense to subsidise the 20% of our poorest households to produce 30% of our children.

All A Question Of Breeding

Not everyone can have the Major's breeding

No sooner had the Tylers returned from the frozen wastes of Swindon, the Major came steaming round. He simply cannot believe the way Lord Flight was slapped down over his "perfectly sensible remarks re breeding".

"I mean everyone knows the socialists have landed us with a huge problem. Everyone knows it's insane to reward feckless teenage girls for having kids they can't afford to support, and won't bring up properly. Think of all the problems we're storing up - well, no, think of all the problems we already have! Hideous costs, disrupted classrooms, vandalism, drugs, muggings, obesity, yet more pregnant teenagers, prisons already full up... gah!  It is mad, literally mad, to encourage breeding among the dregs of society. We should be working to prevent it - by all means possible!"

His reddened face had contorted alarmingly. "Down at the bottom, having kids has become a career option! Yet when anyone talks about it in public, they got taken out and shot!" A finger jabbed towards Tyler. "And that's because of people like you! Too squeamish to face the facts! Too namby-pamby to speak up. You make me sick!"

"Well, thank you, Major," Tyler ventured. "But according to the BBC, nobody goes out and has a child just so she can claim child support - it's hardly a king's ransom, you know. I'll bet you wouldn't get pregnant for that kind of money."

Spluttering, the Major charged on. "I want you to look out the numbers. I'll bet the lower orders are breeding like rabbits. Hopeless moronic girls dropping no-hope kids left right and centre. All paid for by us! US!!"

****

What we need here are a few facts.

And what we need to know before anything is whether the birth rate is higher among benefit dependents than among those who pay their own way?

Luckily the Office for National Statistics publishes an annual review of births in England and Wales, and the most recent one is entitled Who is having babies? Which sounds like it ought to answer our question straight away.

Except that it doesn't.

Yes, it tells us there were 708,711 babies born in 2008. And that over half were born to mothers aged between 25 and 35, with a quarter being born to younger women.

It also tells us that of those births registered jointly by two parents (either married or unmarried), the vast majority were to fathers who claimed to have some recognised occupation (ie something other than lying in bed all day drinking cut-price lager and procreating):

But those stats don't tell us what we need to know.

For one thing they only apply to births registered to couples. 43,000 births (6% of the total) were to single women not living with a partner. And the ONS report gives us no information on their socio-economic classification.

Moreover, there's another c40,000 registered to fathers who are "unclassified", and we can all imagine what sort of fathers they might be.

And then again, of the births registered jointly to couples, a stonking 70,000 of them were registered to couples who weren't actually living together at the time of registration. Now, does that sound like a viable benefit-free home background?

Unfortunately, that's all the info the ONS summary gives us.

In fact, that's pretty well all the hard info we've been able to uncover at the national level.

But there are some local stats which cast a very interesting light on how baby production incentives work in areas where alternative employment opportunities are limited. And they are the stats that show for each local authority area the percentage of births that are to unmarried mothers.

Across the country as a whole, that percentage is now 45% - ie nearly half of all births are now to unmarried mothers. But in some areas of the country that percentage is much higher.

In 2009, the highest was in Blackpool, where no fewer than 69% of babies were born outside marriage. In Blackpool to be born to married parents puts you in a minority of just 31% of your peers.

Joint second highest were Easington and Hartlepool on 68%. And here's the whole top 10 (the national average is 45% remember):

Spot the pattern?

Take a moment to study the list.

Yes, that's correct - all of these areas are in economic black spots up North and in South Wales. All have relatively high unemployment rates, relatively low wages, and rather limited alternative career options for girls at the bottom. All have relatively high welfare dependency.

Compare and contrast with the areas where the percentage of births outside marriage are lowest (ie where the vast majority of babies are born to married couples).

The very lowest, on just 27%, is the Royal Borough itself - leafy Windsor and Maidenhead. Then comes Wokingham (29%), Slough (32%), Surrey (32%), and the somewhat inappropriately named Rutland (33%).

And what have all those areas got in common?

Yes, right again - relatively low unemployment, relatively high wages, and relatively low welfare dependency. In other words, a career having kids has to be relatively less attractive.

OK. OK. Not very scientific.

True. That's because the government does not publish the data we really need to see, so we're driven to these alternatives.

But it does make you think.

Further investigation required. Preferably by the government.

PS If you haven't already done so you should read this excellent article by Dennis Sewell on eugenics and the welfare state. It recounts how the socialist founders of the welfare state believed it would need to be accompanied by the elimination of anti-social elements. As the sainted William Beveridge put it: �those men who through general defects are unable to fill such a whole place in industry, are to be recognised as �unemployable�. They must become the acknowledged dependents of the State... but with complete and permanent loss of all citizen rights � including not only the franchise but civil freedom and fatherhood.� Pity he never got the chance to share his bracing ideas with the Major.

Making Work Pay

So much for Labour's jobs boom

All credit to IDS for pressing on with his welfare reform package in the face of a bare fiscal cupboard.

He hasn't been able to achieve quite as much as we'd hoped and proposed back in the summer (see here), but he has managed to hold on to the crucial central feature of any meaningful reform of working age welfare - that work should always pay.

Under his planned Universal Credit the poor will no longer face effective marginal tax rates in excess of 80% (ie they will no longer lose 80 or 90 pence or more of every extra pound they earn). Instead, the maximum any of them will lose is 76%.

Yes, that is still far to high - much higher than the 55% fixed maximum we incorporated in our own proposal. But the Universal Credit is much simpler than the current impenetrable morass, and that will eventually save administration costs and cut the losses from fraud and error. And at last it offers the poor some certainty - certainty that they will always be better off working than not working.

Here's how it looks for two key groups - single people, and couples with two children. The charts show how their net incomes increase according to how many hours they work, assuming they are earning the minimum wage. We can see how both groups are almost always better off under the new system compared to the existing arrangements, and that they are always better off working more hours:

Moreover, IDS has pledged something our proposal did not offer - that nobody will be any worse off under his plan than under the current system.

Clearly that is a very reassuring promise, but it is also very expensive. Which is why we didn't propose it, and why, despite the additional �2bn IDS has set aside to smooth implementation, there is not enough money to fund lower effective tax rates.

As we have discussed many times, there are some extremely difficult choices here. Everyone wants to cut those high effective marginal tax rates in order to provide a compelling reward for working. But it is hideously expensive - our own calculations suggested that to cut the effective tax rate by 10 percentage points would cost �10 - 20 bn pa.

So in these tough fiscal times where are we to find the money? Our answer was to cut the official definition of the poverty line from 60% to 50% of median income, which we reckoned would save �20 - 30bn pa. And that would fund a substantial cut in marginal tax rates, making work much more attractive to the poor.

IDS has shied away from such a dramatic change. The White Paper reports that DWP have studied our proposal but they don't like the prospect of "substantial numbers of people in vulnerable situations losing entitlement".

And that is the nub of the problem.

We find ourselves with a welfare system that has rewarded poor people for not working. 6 million of our working age poor are now dependent on welfare rather than their own earnings. And we all agree that we must rebalance the incentives so that work is always going to be the more attractive option.

But we simply don't have the cash to focus the entire shift on increasing the reward from work. The horrible truth is that in one way or another we will have to find some way of cutting the current level of welfare provision for the able bodied poor.

We certainly welcome the IDS reforms, which undoubtedly point us in the right direction. But we should be under no illusions - some even more difficult decisions still lie ahead.

Never Mind The Quality Feel The Quantity

Don't worry comrades - we'll sort out the quality later 

Let's see if we can work out what connects the following.

1. Hampstead demands more welfare

OK, we know these people were only put on earth to wind us up, but sometimes they still manage to hit the spot.

First, His Grace the Archbishop says that making the unemployed work for their welfare benefits would be "unfair", and that such reforms could drive people "into a downward spiral of uncertainty, even despair".

No mention of the unfairness to hard-pressed taxpayers who currently have to support these people, or indeed of the unfairness to the people themselves in failing to help them back into the work habit.

And of course no alternative solutions - other than continuing to pour yet more of that evil money stuff over the problem in the vague hand-wringing hope of divine intervention.

You and I may understand that we've already tried money, and it doesn't work. But His Grace clearly hasn't spotted that his government literally doubled the amount spent on so-called "social protection" to well over �200bn pa, the major part of which goes to working age households (even in real inflation adjusted terms the spend increased by nearly 50%). And yet he doesn't think it odd that we have more working age welfare dependents today than we had back in 1997 - despite the intervening boom. To him, more welfare money is Good, so less must be Bad.

Then this morning the DT's Mary Riddell joined his attack on IDS's reforms:

"IDS believes that dysfunctional lives are the root cause of poverty, while the centre Left thinks, correctly, that the reverse is true...

The shift towards a US-style punitive system, under which the recalcitrant are left to starve, is also ill-starred... The US precedent does not augur well for compelling Britons to get the work habit by enforced manual labour, such as litter-picking and graffiti-scrubbing. But for an orange jacket, those unemployed through no fault of their own will be indistinguishable from criminals. With youth unemployment already running at 17 per cent, the Government risks creating a class of chain-gang conscripts."

Yes, poverty is the root cause of dysfunctional lives, so more welfare is the solution. QED.


2. One teacher good; one thousand teachers better

The excellent Reform have just published a report on teaching. They highlight Labour's huge increase in the number teachers and classroom assistants, such that the ratio of staff to pupils fell dramatically:

The programme was driven by Labour's belief that more teachers had to be A Good Thing.

But as Reform shows, studies of pupil performance find that it's not the number of teachers that matters but their quality. And that's a much more difficult thing to achieve than simply adding more bodies and reducing class sizes.

True, Labour poured money into teacher training and improvement programmes as well (a cool �1.5bn pa), but without any obvious results in terms of quality.


Connection

What connects both of these things is the socialist obsession with quantity ahead of quality. From Stalin's famous tractor factories, to the calibration of compassion in terms of welfare spending, the left thinks that Big is always best.

Gah!

As we've blogged many times (eg here), today's British poor are not poor in any historically meaningful sense of the word. Whereas if you need to see how welfare dependency drives dysfunction you need look no further than Dewsbury (see this blog). If there's any causal link at all, IDS is much closer to reality than dear sweet Mary.

Of course, both the Druid and Riddell are unreconstructed left-wingers of the Hampstead variety, so we shouldn't be overly alarmed. The vast bulk of the population agrees with the IDS reforms - work must be made to pay, and no able bodied person of working age should be able to live on unconditional welfare indefinitely. IDS just needs to ignore the shocked gasps from Hampstead and press on.

At the same time you can't help getting a bit angry. Comfortable middle class people like His Grace and Riddell have inflicted more damage on the poor than any number of profiteering City fatcats. They're the ones who've promoted state welfare over individual responsibility, and they're the ones who've all but destroyed the ladder of educational opportunity up which people like Tyler once scrambled.

Their obsession with quantity has left us with the lethal combination of welfare dependency right alongside dumbed down education.

Best To Be Bold

Daft - but not quite as reported*

Nobody said welfare reform was going to be easy. There were always going to be losers, and the welfare lobby was always going to scream very loudly.

But if we are ever going to grip our ballooning �200bn pa welfare bill and provide real work incentives, serious reform is absolutely essential. And to do it right, we must be bold. Nibbling away at the margins is very likely to leave us with the worst of both worlds - plenty of losers and screaming, combined with a welfare system that still isn't fit for purpose.

Take the row over Child Benefit. This morning we got the latest instalment, in which the Treasury is vowing to impose fines on any higher rate tax payer who fails to declare his or her partner is in receipt of CB.

Which is fine, except that the partner may not want to say. After all, a couple's tax affairs are separate these days, and CB is paid direct to the female partner specifically so she can keep it away from the nasty beer swilling brute she's forced to live with (well, that's what Pol says anyway). And what happens if the man/woman doesn't realise he's a top rate tax payer, perhaps because of an unexpected bonus?

The basic problem is that we currently have no way of taxing couples as a unit. Tax is levied on individuals, so HMRC doesn't automatically know the overall household income.

And that is a key reason why our own cuts package last year included the complete abolition of universal Child Benefit (see this blog). In its place, following an existing plan put forward by Reform, we proposed beefed up payments to poor families under the Child Tax Credit, which is means tested on household income. True, in an ideal world none us wants more means testing, but since this is the real world with an increasingly limited budget, that's something we just have to put up with.

Had George followed that line, he'd have avoided all these complexities with fines and the indefensible disparity between one and two earner families. He'd have had a clean workable solution - at least pending the more radical universal benefit reforms promised by IDS.

So why didn't he do it?

You know why. Universal Child Benefit is a totem - the very embodiment of the welfare state. Also, he didn't fancy explaining to those Ordinary Hard Working Families (OHWFs) on �30-40k that they are to lose a couple of grand a year - even though at some stage they could look forward to commensurately lower taxes.

So we've ended up with a dog's breakfast. Failure to be bold and go for a workable long-term solution has landed us in a mess.

Let's hope there's no backsliding on the the other great welfare change - cutting Housing Benefit. The much bolder reforms there find themselves firmly back under the spotlight, courtesy Boris's most unfortunate remarks yesterday about "Kosovo-style social cleansing"*. Here's the TPA's Matt Sinclair arguing the case last night against the Bishop:



We've blogged Housing Benefits many times, and we took a good look at the current situation here. We showed how under Labour, spending soared by 35% in real terms, although the number of recipients barely changed - in other words almost all the money went on pushing up rent levels:

We also showed how in some areas, Housing Benefit dependency has reached 30% of all households, and more. The record is held by Hackney, where an astonishing 43% of all households are on HB:

We noted how many landlords have done very well out of HB, driving returns on their equity as high as 50%.

And we pointed out that the serious economic research in this area shows that it is the landlords who will suffer the biggest hit from cuts. The evidence says that between half and all of the cut in rental subsidy ends up falling on the landlord not the tenant. In other words, rents fall pretty much in line with the cut in subsidy.

But according to the BBC and the rest of the left, the poor are about to be sent back to the workhouse. Indeed, the preposterous Labour MP Tristram Hunt reckons they'll soon be gnawing on bones and putrid horse flesh to stay alive. Tristram is the son of Lord Hunt and was schooled at University College School Cambridge followed by Trinity - we should probably assume he's never sampled bones, putrid horseflesh, or even KFC, and knows as much about life on low income as the Duchess of Buccleuch.

Admittedly George is from a similar background to Trist, but on HB reform he is a lot closer to reality. His bold HB reforms are a vital step in the right direction and he must not allow himself to be intimidated.

Everyone out here agrees that HB recipients should not be funded to live in houses the average taxpayer can't afford, and that may well lead to some relocation. But that's simply too bad - the money has run out.

Nobody's being sent back to the workhouse. And if the reforms lead to anything like the grim Dickensian world Trist describes, Tyler will personally gnaw on the first bone he can find lying in the gutter.

*Footnote  Boris was obviously daft to have referred to Kosovan cleansing. But when you hear the actual interview - as opposed to the hyped up reports of the interview - it's pretty clear he was actually just saying that he wanted to see good transition arrangements for the new system. He wasn't opposing the whole deal, as was reported subsequently. Well, that's what Tyler thinks anyway.

Reflections From Brum

As we've noted before, the main function of member attendees at party conferences is as walk-on extras in a giant mediafest. This year, with the party in power, the media were more pervasive than ever. According to Birmingham council, there were 2000 of them buzzing around, vastly outnumbering the 800 police reportedly guarding the event.

Now, Tyler discovered that all the UK's commercial radio stations were being served by just one reporter (who also doubles up as a station manager). Which raises the obvious question as to WTF the rest of them were all doing? Especially the legions from the BBC.

One thing was wining and dining each other, presumably on expenses. Mr and Mrs T were themselves seriously unsettled by a close encounter with the Bishop and Pol enjoying a candle-lit dinner a deux.

But mainly - as always - the media kept themselves occupied by manufacturing stories about party splits.

This year's big split story was over George's Child Benefit announcement. There was supposedly a "backlash" from Tory activists against this "vicious attack" on the middle class.

Backlash? The only backlash Tyler could discover among activists was the one against the media making up stuff about backlashes ("you wonder which conference they're reporting on"). Without exception, everyone Tyler asked thought it was mad to pay CB to those on �40k pa and wanted George to press on asap.

Yes, of course, the CB change as announced was pretty crass inasmuch as the details have clearly not been thought through. And sure, the announcement was only made because politically George needed to counterbalance the announcement of his cap on total welfare benefits per household. But there's plenty of time to refine it before implementation in 2013.

The key point is that CB will no longer be a universal benefit. George has broken the spell. CB will be means tested just like most other working age welfare. And that means there is absolutely no reason why it shouldn't be rolled into IDS's Universal Credit (see this blog).

The best bit of previous conferences was the fringe - the side meetings that take place outside the main event to debate specific policy issues. Often they were attended by shadow ministers and you got to challenge them face-to-face on the stuff that had been bugging you. Sadly, this time through most of the fringe events attended by Tyler had no ministerial representation. Speakers mainly comprised think tankers, lobbyists, and familiar talking heads, repeating arguments that are already familiar to most of us.

The best of the fringe was undoubtedly the bit taking place outside the main conference altogether. This was organised by the Freedom Association in conjunction with the TPA, and for the second year running featured an all-day programme as an alternative to the main conference proceedings. There were many fascinating sessions featuring the best of the centre right - Redwood, Carswell, Murray, Dan the Man, and our star local councillors - ie the ones who have managed to cut spending.

And Cam's Big Society? No, it certainly hadn't gripped anyone Tyler spoke to, despite hours of worthy attempts to explain what it might actually mean in practical terms.

The reason everyone struggles with the concept of course, is that we don't yet know how the space vacated by a shrinking government will be filled.

According to the BBC and the rest of the left, nothing will fill the space other than disease, ignorance, and giant snakes. But for those of us who believe in markets, the space will soon be filled by the education and healthcare equivalents of M&S, Tescos, and BUPA. Oh, BUPA fills part of the space already - that's handy.

This is a key point to grasp. The left's argument that parents will have to work all night running the new schools themselves distracts us from the reality. The reality is that private companies will have to come in - just like they've already done under the US and Swedish school reforms. Gove doesn't want to say that right now because of all the media flak he'll take, but that is the reality.

Because under a market based approach, there is no clearcut masterplan you can announce upfront. You can never be quite sure ahead of time precisely how things will pan out - you only discover that once the market has done its magic work. And for many people, that's a very scary prospect.

So while choice and competition is the only way to drive better value in our public services, and the only way of delivering better services for all, Cam has the tricky job of navigating us from here to there without scaring everyone back into the arms of Millie.

Hence the comfort blanket.

Hence The Big Society.

PS Did  you see Jezza Hunt on Newsnight telling us straight that people shouldn't have children they couldn't afford to pay for out of their own pocket? Blimey. We thought unmarried three child Paxo was going to explode with righteousness. How dare taxpayers seek to limit the number of welfare kids they have to support? And then this morning some woman on R4 Today told us taxpayers should be happy to pay for these welfare kids because it's an "investment in the future". Not a burden that escalates from one welfare generation to the next, but an investment. No wonder we're in this mess.

Carrots, Sticks, Chickens And Eggs

Are you sure that's enough carrot?

Can it be true? Has IDS won his well publicised "battle with the Treasury" over welfare reform? According to the Times:

"Millions of welfare claimants will have their benefits scrapped and replaced with one �universal credit� under a ground-breaking deal secured by Iain Duncan Smith.

Housing benefit, income support, incapacity benefit and dozens of other payments are set to go after the Work and Pensions Secretary won a months-long dispute with George Osborne, the Chancellor, over whether the reforms were affordable.

The new system will carry a guarantee that anyone in work will be better off than someone on the dole. Claimants will be allowed to keep more of their benefits when they take a job or increase their hours."

Which all sounds excellent - a huge simplification and a clear message to everyone that work pays. It's precisely what we were trying to achieve with the TPA's reform proposals published a couple of months ago (see this blog). So hurrah!

Except of course, we know the Devil of Detail is still lurking out there in the shadows.

In particular, how much of this universal credit will the working poor get to keep once they start earning their own income?

As we know, a major problem with the existing system is the high rate at which they lose benefits once they start earning, with their effective marginal tax rate routinely running at 70% or even higher. It's a huge disincentive, and any sensible alternative has to cut that effective tax rate down closer to what the rest of us face. We proposed  a flat 55% in our TPA paper, leaving the poor with 45 pence of every extra pound they earn - still worse than the deal we give the richest bankers but much better than now.

According to the Times report:

"Whitehall sources said that a withdrawal rate of between 60 and 65 per cent is now being debated."

So does that mean IDS's scheme will cut the effective marginal rate down to 60-65%?

Unfortunately not. As explained in this summer's consultation paper from the DWP, a 65% withdrawal rate means that for every �1 of extra net income you earn for yourself, you lose 65 pence from your universal credit. But assuming you are earning more than the annual personal tax allowance (currently �6475), in order to generate an extra �1 of net income, you will have to earn a gross �1.47 (from which will be deducted 20% income tax, and a further 12% National Insurance).

So under the Universal Credit as apparently agreed, many of the working poor will get to keep just 35 pence out of the extra �1.47 they've earned - an effective marginal tax rate of 79.9%. Which is hardly any improvement at all on the current situation.

True, combining the confusing array of current benefits into one single benefit will certainly help people understand what's going on, and they'll know for sure that they will be better off working. Which is a big step forward.

But in terms of carrots to tempt the workless poor back to the grindstone, a near 80% tax rate is still not very juicy.

Yes, yes, we understand the problem - reducing these effective marginal tax rates costs a packet, and there is no money left.

And that's why back in the summer we proposed cutting the basic level of welfare provision for the working age poor. By cutting the official poverty line from 60% to 50% of median income (where it always used to be) we reckoned we could free up �20-�30bn pa to spend on reducing marginal tax rates. We calculated we could afford to get them down to 55%. And of course, a lower basic level of welfare provision in itself makes all paid employment relatively more attractive.

Unfortunately it sounds like DWP is still not ready to think that unthinkably.

OK, if the new consignment of carrots isn't going to be enough, what about some new sticks to go with them?

It was pretty clear in the DWP consultation paper that bigger sticks are on the way, although they masquarade under the title "personalised conditionality regime" (presumably that's someone's idea of a euphemism, even though it actually makes the whole deal sound more like Nazi Germany). Quite what the new sticks are remains unclear, but ultimately they all have to come down to "do this job or starve" - a policy formula long advocated by Tyler's Italian barber.

And then there's the tricky issue of chickens and eggs, otherwise known as "are the workless poor feckless and irresponsible because they're feckless and irresponsible, or is it because we've allowed and even encouraged them to be like that?".

That's particularly important in relation to Housing Benefit. It's all very well IDS rolling HB into his single universal credit, but what's then to stop the feckless and irresponsible poor spending the cash on drugs and online gambling? Plenty of private landlords reckon that is precisely what will happen (eg see here). And if the tenants don't pay the rent they get slung out onto the street, and then the local council has to find them expensive emergency accommodation. We end up spending even more than we were spending in the first place. Kind of idea.

Hmm. Tricky.

The universal credit is undoubtedly taking a risk here, but individual responsibility has to start somewhere. By continuing with the current system - whereby the rents of those on HB are paid direct to landlords rather than being entrusted to the welfare recipients themselves - we condemn both the recipients and taxpayers to a spiral of everlasting welfare dependency.

This particular chicken and egg link is highly corrosive and must be broken. The vast majority of HB recipients are surely quite capable of budgeting for the rent, a regular predictable outgoing. Moreover, by giving them cash rather than simply paying the rent demanded by the landlord, recipients are given a strong incentive to shop around for a better deal - something that will never happen under the current system.

So has IDS "won the battle"? From what we can see, he's been given the go-ahead for a big simplfication programme, which is good. But we still seem to be some way off making work really pay.

Update - Good article on the Detail Devil by Neil O'Brien: he runs through five key questions where the Times leak gives no detail. He suggests "the Times has stumbled on something that was going to be announced later". But of course the whole thing could simply be another of those Black Arts leaks aimed at bouncing George ahead of the cuts announcements on 20th Oct.

Fairness For All... Except Working Taxpayers

Everyone is entitled to a proper cooked breakfast

As we await the outcome of Iain Duncan Smith's think-the-unthinkable welfare review, news reaches us from an acquaintance out in the country. A cleaner he knows:

"...met up with someone she knows well from schooldays locally and they exchanged the usual. What are you doing now? asks my contact. I'm on the sick, was the reply. What's wrong with you then? Oh it's my nerves she said, in fact I'm trying to get permanent disability now. How does that work? Well, you just shake a bit and cry and they believe you.

My indignant contact told me that this individual was on �275 per week, and was just off on a holiday in the Med, on what promised to be "a bit of a booze cruise". She is never, she said, going to work because she couldn't possibly get as much money working. Naturally it makes the cleaner, who grosses less than �275 for a week's cleaning, very angry indeed."

It makes Tyler very angry as well.

We've blogged the welfare disaster so often, you will be bored reading it. But here we go again.

The current level of welfare is set not by reference to what people need to survive, but by what they supposedly need to be "included" in society. It is described as a relative rather than an absolute definition of poverty - the more everyone else has, the poorer you must be, and the higher must be the level of welfare support you need.

Holidays are a case in point. Since "everyone else" now takes holidays, welfare has to provide the funding for the unwaged to take them too. Which is why we're paying for the cleaner's "sick" friend to take this booze cruise. Even though the cleaner herself has probably never ever done such a thing, and is rightly outraged.

The whole corrosive concept of relative poverty was dreamed up half a century ago by a bunch of left-wing academics here in Britain. Yes, I'm afraid Britain was responsible.

And when we say left-wing, we don't of course mean anyone like Bob Crow, whose views of injustice might arguably have been formed by direct experience of life in poverty. No, we mean the usual suspects - Hampstead sons of privilege whose principle knowlege of poverty came from reading Dickens (one of the prime movers was literally 27th in line to the throne and had presumably grown up dining off gold plates - interestingly, he was also homosexual, which at that time made him an outsider, and Teach-Yourself-Freud says he was merely following the Cambridge spies in undermining the society that he felt excluded and denigrated him).

As we know, these Hampstead types have absolutely no idea how people operate out in the real world. Their own lives have been shaped by family wealth and privilege, and they simply can't relate to the rest of us who have to scrabble for cash by fair means or foul. They have no grasp of the idea that changing the pattern of financial reward will inevitably change the pattern of behaviour.

Similarly, they have no idea how people beyond the servants' hall live their lives. For example, one of their first attempts to define relative deprivation asserted that you were deprived if you didn't have a cooked breakfast every day. Obviously in Hampstead they were used to devilled kidneys and kedgeree served up by cook on those outsized silver salvers, so they reckoned that was the norm. Needless to say, down on our estate (council estate that is) I can't recall anyone having a cooked breakfast, and we can't all have been deprived.

Anyway, that's all in the past, and the question is what can we do about it now? What must we change to ensure working people on low incomes do not get faced with acquaintances on the sick swanning off on booze cruises?

Ideally, we need to redefine the poverty line back to what most of us always thought it was in the first place - the money that you need to feed, clothe, and house yourself, but not the money you might like to spend on holidays and booze. If you want the extras, you have to work for them.

Unfortunately, there is at present no accepted definition of what exactly constitutes need. We have no standard for measuring the poverty line in absolute terms.

There is however one thing we do know. We know that the reason these Hampstead types devised the notion of relative poverty back in the early 60s was to solve a problem. It was a problem for the left, and it was simply that the never-had-it-so-good era of post-War growth had to all intents and purposes ended absolute poverty. The left had thereby been robbed of its strongest sales pitch, and desperately needed a new one. Relative poverty was that new pitch.

So suppose we do the following. Suppose we take the average income from that same period back in the early 60s, which we know was well above the absolute poverty level. And suppose we uprate it for inflation since then. What would that be in today's money?

Luckily we don't need to crunch the numbers for ourselves because the IFS has made available a handy spreadsheet containing their own calcs. And according to them, the median household income from 1961, adjusted for inflation, is equivalent in today's money to an income of  �195 per week, or �10,140 pa*.

Which is very interesting.

For one thing, it is way below the �275 per week being handed out to our booze cruiser.

More fundamentally, it's under half today's median household income of �407 per week*. And as regular BOM readers will know, we have long argued for reducing the official definition of the poverty line from 60% of median income to 50% (eg see this blog). So a 50% poverty line would still leave welfare recipients better off than the average household in 1961.

Back then, a commitment to lift every welfare dependant above the living standard enjoyed by that year's median household would have been thought wildly generous. It would have been way above anything understood as poverty income.

So what's changed? The bundle of goods 1961's median income can buy today (adjusted for inflation) is still way above real poverty.

The only reason we even consider it might not be enough is because we somehow allowed those Hampstead socialists to persuade us that poverty is a relative concept.

It isn't.

And a system of welfare that has hard-working cleaners paying tax to fund welfare dependant booze cruises is something that shames us all.

We should never have allowed the left to build such a monster in the first place. We must not flinch now as it's rolled back. We owe it to that cleaner.

*Footnote - The IFS figures relate to 2008-09, which is the most recent year for which we have official stats. Also note that they are figures for "equivalised" income, which means the raw data on individual household incomes have been adjusted to allow for different types of household (how many adults, how many children, etc).

Don't Blow Welfare Reform

No more turning of backs

Indolent Tyler is still away, undergoing therapy by serial holiday. But the recent leaks on welfare reform demand a quick post.

The story seems to be that George and IDS had a stand-up row over the latter's demand for an extra �3bn pa funding for his welfare reform programme. It apparently went like this:

IDS: "You ******* little ****. Give me the ******* money, or I'll ******* have you."

George: "**** off Grandad."

Although the Telegraph reports the exchange thus:

IDS: "I am not prepared to tolerate the appalling way you treat my department. Your officials must show more respect to my staff. They do not deserve to be treated in such an arrogant and rude way."

George: "If you come up with proposals that work, they will be treated with respect. Find �10 billion of welfare cuts � or I won't give you �3 billion for your new scheme."

We've blogged this issue many times. Alongside Gove's schools reforms, welfare reform is by far the most important long-term legacy Cam could leave. Unless we can make work pay, the inexorable growth of Britain's underclass will eventually drag us all under.

The key is to cut the horrendous marginal tax rates faced by the poor. Benefit withdrawal means that many of our poorest citizens face effective marginal tax rates of 60, 70, and even 80% - well in excess of the rates faced by the richest bankers. They have no serious financial incentive to work. That can't be right, and must be changed. Even the maddest of the mad Labour leadership candidates seems vaguely aware of that.

The problem, as we all understand, is money. To reduce the rate at which benefits are withdrawn is horrendously expensive. Calculations based on our recent TPA study suggests that to cut the effective marginal tax rate rate by 10 percentage points would cost �10-15 bn pa. Which means that the real question is what gets cut to pay for the reform?

IDS seems to have argued that the cuts should all fall on other departments - ie his department simply gets an extra dollop of cash. But with DWP already getting well over a quarter of all public spending, that was never a serious runner.

More realistically, he may have been hoping that he'd be allowed to keep the savings he makes from cutting universal benefits (aka middle class welfare). We have long argued for such cuts, which as we said last September, could easily save �12bn pa. True, that �12bn includes cuts to items that are outside DWP's budget (such as free bus passes, free TV licences, and the student loan subsidy), but our biggest item is the abolition of DWP's universal Child Benefit, which would save �8.5bn pa net of additional help for poor families. And �8.5bn would give IDS just the money he needs to tackle the welfare trap.

Neat.

Except of course, for two things.

First, whacking the middle class to improve incentives for those famous dole scroungers and single mums might prove a tad "controversial".

And second, there is no money.

Let's just repeat that second point in case you missed it.

There is no money.

Or to put it another way, DWP has to contribute to the overall cuts package. The overall welfare bill - around 30% of total spending - has to be cut. IDS may want to keep the savings he makes on cutting universal benefits, but George can't afford for him to do so.

Which only really leaves the third option - the one we argued for in our welfare reform paper. We have to cut the poverty line. We have to recognise that we simply can't afford to fund welfare targeted at 60% of median income while at the same time making work pay. And our proposal was that we should redefine the poverty line down to 50% of median income.

If we did that, IDS would have plenty of cash to work with. On our estimates, setting the poverty line at 50% rather than 60% saves �20-30bn pa just on the welfare paid to working age households (ie leaving pensioner welfare untouched).

So is IDS thinking about that?

We certainly hope so. Although clearly he won't want to divulge as much to those penny-pinching accountants over at HMT.

But whatever the arguments, and whatever the heat, the most important thing is that IDS sees this through. We simply can't afford another wibbly wobbly government whose only solution is to spend even more on welfare and leave us with even more dependency.

PS Tyler must confess to being shocked when he heard that Matthew Elliott is moving from running the TPA to heading up the no2av campaign. Matthew is a real star, and has been the driving force behind the TPA's growth and success. Of course, he will do an outstanding job with the new campaign - and if anyone can stop this self-serving dilution to democratic accountability, he can. So naturally we wish him every success. Besides which, he will be returning after the AV referendum. But the TPA is bound to miss him. The bright side is that he will be leaving the TPA in the more than capable hands of Matt Sinclair, currently Research Director. Tyler knows Matt well, and never fails to be impressed by his ideas and energy - he has big shoes to fill, but he has the big feet to match. So the very best of luck to him, and to everyone else in the team.

PPS The HMT official who upset IDS so much is one Miss Lombardelli. According to the HMT organisation chart she is Head of Labour Market Policy. Not quite sure what that entails, but with a wonderfully scarey name like that, I'm betting she routinely makes officials in the spending departments offers they can't refuse. HMT has always featured a sprinkling of strong scarey women. During Tyler's time, he worked directly for one, and had frequent dealings with another. The thing about them is that they have to be strong. It's a robust environment where wilting isn't allowed - Tyler can still recall the shock of transferring there from the sedate cosy world of a spending department. And for women it's probably even tougher - even in 2010, not one has ever made it to Perm Sec. Sounds like IDS's officials need to get real.

Council House Sales - Another Taxpayer Rip-Off

Tyler will have bored you many times with his cigar-puffing reminiscences of growing up on a council estate in the 50s. Deprived? Of course not - back then, a quarter of all families lived on council estates. With another one-third renting privately, for the bulk of the population owner-occupation still lay well into the future.

Today, the percentage who live in council rented property has fallen to just 9% (England - facts here). But add in the percentage living in other social housing (Housing Associations etc), and the total is 17%.

Which is a bit surprising. Given that since 1979, around 3 million council and social houses have been sold to sitting tenants under the right-to-buy scheme (and note this wasn't all down to The Evil Tories - the sales continued under Labour).

What that means - and I do apologise if this is the bleedin' obvious - is that councils and other tax-funded landlords have built more homes to replace those they've sold. In broad terms, across the UK, they started in 1979 with 6 million homes, and now have 5 million. Given that they sold 3 million, that means they built 2 million.

In effect, the taxpayer has been funding a speculative property developer. The developer - S Shopper Homes plc - has built millions of homes in order to flog them off later.

Unfortunately, unlike property developers in the real world, S Shopper Homes has sold its properties at below market prices. Well below market prices. Sitting tenants have been allowed to buy at considerable discounts.

Over the last decade, the price discount in England has averaged 37%. Which works out at nearly �11bn in cash terms. And going back, discounts were even higher. As recently as 1998-99, the average across England was an astonishing 50%.

We haven't been able to track down all the data going back to 1979, but on the basis of what we know about the last decade, we estimate that the total cost to taxpayers of these discounts in today's money has been well in excess of �50bn (ie roughly one-fifth of the sales took place in the last decade, and they cost us �11bn... plus, the historic discounts were higher).

Now, we do understand that the original Mrs T had other reasons for flogging off council houses. And we do understand all that stuff about a property owning democracy. But what we want to know is WTF did S Shopper sell these things at such huge discounts? It's our friggin' money.

And there's something else about council house tenancies as well.

Whether we like it or not, there are some people who just aren't capable of funding and/or managing their own accommodation. Sure, we can let them sleep in a ditch, or reopen the workhouses, but realistically, the Major aside, most of us would not sign up for that. Realistically, taxpayers are are on the hook to house them.

The real choice is between funding them in private rented accommodation - with all the expense and problems we blogged yesterday - or putting them into social housing of some kind.

But we need to remember one very important thing. As Cam said yesterday, allocation should be on a needs basis. Social housing must be seen as part of the welfare safety net, and there can be no right for a tenant to occupy a particular house for ever.

And in future, there can definitely be no right for sitting council tenants to buy out the taxpayer at a knock-down price.

Ripping Up The Rent Book

Good news for landlords

One element of the welfare bill that's got totally out of hand is Housing Benefit (HB). During the Labour government, it soared by 35% in real terms, and this year it will cost us well over �20bn.

There are currently 4.7m households receiving HB, which is getting on for one-in-five of all households. Or to put it another way, every family paying for its own housing is also paying a quarter of another family's housing costs.

In some areas it's even worse. 30% of all households in inner London are on HB, and in Hackney it's an absurd 43%. This chart shows the 11 Council areas above 30% (Aug 2009):

So what are we going to do about it?

In the June budget, George set out his plan. First, he imposed a fixed maximum cap on the reimbursement of housing costs, irrespective of where they are (�400 a week for a four-bedroom property and �250 a week for a two-bedroom home). Second, he announced that from 2012, the maximum reimbursable rent for each HB local area (there are 153 of them) will be reduced from the median of market rents for that area, to the 30th percentile, and will thenceforth be uprated annually in line with the Consumer Price Index, rather than market rents. He reckons those changes should eventually save �4.2bn pa.

Needless to say, he's picked up some serious flak. The left-wing press warns:

"Thousands of people will be made homeless as public spending is slashed because of a dangerous combination of higher unemployment, increasing repossessions and cuts to housing benefit...

The retired, disabled people, carers and working families will be hardest hit and charities predict it will trigger the steepest rise in families living in unsuitable accommodation and individuals sleeping rough since the 1980s.

Those in London will be the worst affected, forcing an exodus of poorer people from the centre to outer boroughs... The homeless charity, Shelter, said that some households in London currently receiving housing benefit will have to find a shortfall of up to �1,548 a month to meet their housing costs. The result, say opposition MPs, will be "social cleansing" of poorer tenants from richer areas."

"Social cleansing" - a slogan worthy of the great Bishop Snow himself. To be frank, we've never been able to understand why poor families should expect to be housed in rich areas at public expense. Apart from anything else, doesn't the left's position on equality say we're all much happier if our neighbours are not miles richer than us?

But setting that on one side, why does the left automatically assume HB recipients will be rendered homeless or otherwise cleansed? Why don't they consider the possibility that many landlords may be forced to cut the rents they charge?

Because what we have here is another classic escapade of the Simple Shopper. The very same S Shopper who managed to bungle us into the ludicrous GPs contract and all those overpriced PFI contracts (see many previous blogs on both). And what he's done here is to bumble his way into the private property rental market and spray huge amounts of our money in the direction of Britain's buy-to-let landlords.

A recent article in the Investors Chronicle gives a good flavour of how it has worked out:

"Nathan is an experienced investor who bought a portfolio of five terraced houses in Burnley in Lancashire five years ago, paying around �35,000 in total. "The houses are well built. The problem is the tenants aren't," he says. "I didn't buy for capital gain, I bought for income. In this area, everyone is on housing benefit, and there are guaranteed rents of �65 a week." In theory, this adds up to an astonishing gross rental yield of 48 per cent...

...Graham owns a substantial portfolio of property in the north east, and says he's been letting to tenants on benefit for donkey's years. "It's like being a second hand car dealer," he says. "The mark-up is high, but it's the shitty end of the stick."

In problem neighbourhoods, it is possible to buy houses for as little as �6,000 from desperate sellers. Graham claims he can receive up to �3,000 a year in rent on these houses from local authorities - a 50 per cent return on equity."

Now gross rental yields of 48% and 50% returns on equity are telling you something. They're telling you someone is paying through the nose. And there are no prizes for guessing who. The S Shopper has come into the market with a fat wad of cash and pushed rents far above where they ought to be.

Consider the facts. As we noted above, since 1997 the cost of Housing Benefits has increased by 35% in real terms. Yet the number of HB recipients has hardly changed - 4.7m now compared to 4.6m in 1997. Which implies that most of the increase has been driven by a sharp rise in rent levels.

So what happens now George has grounded the Shopper? Now that he's imposed his own lower rent levels over the heads of the landlords?

Well, the landlords are naturally saying it could mean the end of their participation. After all, they're dealing with some pretty scummy tenants, and the least they deserve is a sensible financial return. As one of them explained to the Investors Chronicle:

"Every now and then you get a nasty shock. Drug dealers operating from a property; someone found dead after ten days; a tenant who hacked into the attic and sold the hot water tank for scrap metal. The RSPCA once boarded up one of my properties as the tenant walked off, and left behind a menagerie of reptiles...

You don't know the tenant has moved out until the housing benefit stops, then you find out your property's been empty for 30 days and invalidated your insurance. If a tenant trashes the place, you have to fork out �3,000 on magnolia and new carpets."

All of which sounds pretty bad.

And as the always instructive Mr S and M points out, the economic research in this area confirms that it is the landlords who will suffer the biggest hit. The evidence says that between half and all of the cut in rental subsidy ends up falling on the landlord not the tenant. In other words, rents fall pretty much in line with the cut in subsidy - just like George intends.

The question then is how much will the supply of private rented housing to those reptile owning HB recipients shrink in response?

And the answer is we don't really know.

But set against returns of 50% on equity, our guess is that rents could fall quite a bit before from current levels before we hit a big fall in supply.

George is quite right to rip up the rent book.

Rule By Failed Rock Star

Al finally makes it into the Merseybeats

BOM's old friend Rockin' Al Johnson has finally made the big-time. He's got his own rock show on the BBC. Even better, you're paying for it.

OK, it's called Alan Johnson: Failed Rock Star, but at least he's up there in the limelight, grooving alongside such all-time greats as the Merseybeats (pic). And as he cheerfully admits, if only he'd made it first time around back in the swingin' 60s, he need never have settled for politics to get the attention he craves.

And he's not the only one - from Bliar down, stacks of NuLab's ministers went into politics only after they'd bombed as rock gods. Even now, given half a chance to join the Merseybeats, most would drop their current has-been minister jobs like a shot.

Tyler was reminded of this on Wednesday afternoon strolling along a sunlit side-street in Westminster. Coming the other way were the Blues Brothers - stylish sunglasses, linen suits, hand clappin, foot stompin, funky-butt ... podgy. Obviously they were jive talkin', but as they passed, Tyler managed to catch a word. It began with eff and ended in ucking. At which point Tyler recognised disgraced Brown spinner Charles Whelan and disgraced Brown enforcer Nick Brown, making their way back from some lunchtime gig in a karaoke bar.

The thing is, rule by failed rock star turned out to be a great gig for those doing the ruling, but not quite so great for rest of us. If only Al had made it in the 60s, he need never have ended up floundering around as Home Secretary, or "at the helm" of the NHS or our social security system.

The man now at the helm of our nightmarish �200bn pa social security system is most assuredly not the rock star type. The one time he tried his hand in showbiz, his performance was devastatingly mocked by one critic as "the Walmington-on-Sea amateur dramatic society does Henry V". There's no way he'll ever be invited to join the Merseys.

Yet, as we saw once again yesterday, this self-styled Quiet Man of British politics is actually the one who looks like finally gripping the crippling inconsistencies and contradictions at the heart of our welfare system.

The most difficult question there, of course, is the one we blogged several times last week (eg here and here), and the one we investigated for the TPA's new paper Welfare reform in tough fiscal times. How do we make sure work pays for the near 6m working-age poor who currently depend entirely on welfare? And even more difficult, how do we do it now that the failed rock stars have blown all the bread?

As IDS spelled out once again in yesterday's consulation paper, after 60 years of our gargantuan welfare state, Britain's workless poor face a welfare trap of life-mangling proportions.

The paper contains the following chart, showing how the trap works for a couple with a single earner on the Minimum Wage, and two children. The family can certainly increase its net income (vertical axis) as the earner works more hours (horizontal axis), but only by a horribly small amount (ignore all the various bands in the chart - they simply show how the various benefits taper away as the family's own earnings increase: focus on the top line which shows how net income increases as hours of work increase):

This means "that someone at the National Minimum Wage would be less than �7 per week better off if they worked [up to]16 extra hours and earned an extra �92 (an effective wage rate of 44p per hour)". It also means that he faces "a Marginal Deduction Rate of 95.5 per cent on earnings between �126 and �218".

As the report puts it, "a system that produces this result cannot be right".

So what's to be done? The report offers three possible approaches:

1. A Universal Credit - all existing benefits abolished and combined into one simple to understand and administer universal benefit.
2. A Single Unified Taper - retains the existing range of individual benefits but "withdrawal would be through a taper that would be applied to their overall benefit eligibility, rather than the individual benefits as is currently the case".
3. Single benefit/negative income tax model - as recommended by the TPA (marking the very first time ever a TPA policy proposal has been explicitly picked up in an official government publication - hurrah!)

We can only welcome IDS's boldness and give him every support.

True, his paper does not mention the other key aspect of the TPA proposal - ie the need to fund these reforms by lowering the poverty line - but we can work on that.

The main thing is that after all the opportunities wasted by those wannabe rock stars, we finally have a government that has the guts not only to think the unthinkable, but also to do it.

We hope.

PS So who is ultimately responsible for the fact that we ended up being ruled by fourth rate rock stars? Fundamentally you've got to blame these guys:



Their intoxicating combination of teen beat and cocking a snook at authority changed the world for people like Rockin' Al. As he says "everything changed and changed forever at the dawn of civilisation - the arrival of The Beatles... I used to try to model myself on Paul McCartney." No wonder he ended up in Bliar's government.

And while we're on the subject, Mrs T has been scouring the darkest recesses of the Tyler attic (filthy dirty, covered in cobwebs... but she's good with the kids). As we've certainly mentioned before, at about the time J Lennon was asking the Queen Mum to rattle her jewelry on live TV, Mrs T was bunking off school to visit the Fab Four in their Surrey mansions. In those days, it was nothing for 13 year old convent girls of a certain disposition to bunk off, hitch a ride, and knock on George Harrison's front door. And Mrs T has the snaps to prove it. Well, that is, she has the snaps somewhere. But unlike the granny who's flogging hers next week, Mrs T hasn't found a single one. Bah!

How We All Ended Up On Welfare

Something must be done, and it was... the trouble is it's since been overdone

Once upon a time, long long ago, welfare was paid to the poor. And only to the poor.

But these days, welfare is paid to pretty well everybody. Even Jonathan Ross and those plutocrats on the Wharf get welfare. It doesn't matter how rich you are, there'll usually be some way of getting your snout into the welfare trough. From Child Benefit, to free bus passes, to the winter fuel allowance, the opportunities are there. If you want some, you can get some.

We've been reminded of this by reaction to last week's TPA report on welfare reform (see below). It's been pointed out that the TPA's proposal to redefine the poverty line - lowering it from 60% of median income to 50% - would remove welfare support from families who, while not poor, would lose a substantial chunk of their current welfare income.

Now as it happens, the Office for National Statistics has recently published its latest annual report on the effect of taxes and benefits on household incomes. It covers 2008-09 and it shows us just how much welfare is received by households at different income levels.

Let's leave pensioner households out of it (as we did in the TPA report), and focus on non-retired households. The ONS figures show that households on around median incomes (gross incomes of �32-35k pa) on average get well over �3,000 pa in cash benefits. A 10% top-up to their own not insubstantial incomes from welfare benefits, including Child Benefit and Brown's various tax credits.

And here's how it looks across the entire income distribution (non-retired households only - excluding pensioner households):

So as we can see, under our current welfare system, even the richest 10% of households, with average gross incomes in excess of �100 grand pa, still get welfare - in their case averaging �1300 pa.

On what possible basis can that make sense?

The alarming and unpalatable truth is that after 60 years of the welfare state, pretty well all of us have ended up on welfare.

It's no way to run a 21st century economy, already burdened with a massive fiscal crisis, and facing a competitive onslaught from the East.

In the famous words of our most famous playboy prince during a previous economic crisis, something must be done.

*****

Much reaction to last week's post on redefining the poverty line. Mainly supportive.

Picking up from the TPA report on welfare reform, we argued that the official definition of the poverty line should be cut from 60% of median income to 50%. We calculate that would save �20-30bn pa in welfare costs currently spent on the able-bodied working age poor, money that could be better spent making work pay (ie reducing the scandalously high effective marginal tax rates faced by the working poor). As far as we can see, that is the only realistic and affordable option for reforming the current iniquitous system that traps so many millions on welfare.

Of course, the left will never buy it, and Labour blogger Hopi Sen spells out why:

"If you�re the Taxpayers� Alliance, the way to cut the gordian knot of Welfare reform without spending any money seems to be to redfine poverty to a much lower level, reduce support for those a little above that level, and abandon pretty much all support for those on medium-low incomes.

In other words, if you�re near the current definition of poverty, struggling to get by, and find tax credits and child benefit and income support useful- Watch out. They�re coming to get you."

We've posted a full response to Sen on the TPA site, including the fact that he and the left offer no affordable alternative for reforming our current shambolic and dysfunctional system. But there's one point that it's worth amplifying here.

As things stand, the official poverty line is benchmarked off a median income figure that includes existing welfare benefits. And Sen reckons it ought to stay that way.

We reckon that's wrong. The reason is that it's a circular calculation. It means that both median income and the poverty line are artificially inflated by the welfare system itself. The system ends up chasing its own tail towards ever higher costs and an ever worse welfare trap.

This highlights a key difference between us and the left on welfare. Whereas the left see welfare as a tool for compressing income relativities throughout the income range, we believe that for able-bodied adults of working age, welfare payments should, in principle, be confined to a safety net, designed to relieve absolute poverty among those towards the bottom.

Paying income support to those who are at or around median incomes means paying them with one hand and taxing it back with the other. Which is not only administratively expensive and wasteful (we have previously estimated the cost of this so-called fiscal churn at at �5-6bn pa), but it is also certain to distort the way people choose to work, and to spend their own earnings.

The dispute over the definition of poverty goes back half a century. That's when the left dreamed up their definition of poverty as a relative concept. They have since argued that welfare should focus on relative income distribution, and they have prevailed, which is how we ended up with the current official definition of the poverty line at 60% of median income.

But that's not what most of us actually think of as poverty, which tends to focus on not having enough food, or a roof over your head, etc. That is the traditional definition of poverty, known as absolute poverty, and in principle, it is the approach we favour. Which is why in Appendix C of our paper we recommend that the Department for Work and Pensions conduct some proper analysis in this area and publish a measure of absolute poverty, comparable to the one produced by the US Census Bureau.

Meanwhile, Labour have left us with a gigantic unaffordable mess, in which welfare is paid not just to the genuinely poor, but also middle income earners, and in some cases all the way up the income distribution - as noted above.

*****

What exactly is a negative income tax?

As you will recall, the TPA welfare reform calls for the scrapping of a slew of existing benefits and their replacement with a single negative income tax (NIT). But no less a person than the Devil himself has since asked us to explain exactly what the devil a NIT actually is. So here goes.

The NIT is an idea atrributed by many to the late great Milt. It's easiest to think of it as a particular kind of means tested welfare benefit. All households are guaranteed a certain minimum income paid to them by the government, whether or not they have any income of their own. But instead of being paid through a separate benefits agency, this one is paid by the tax authority. So it ought to be a lot cheaper to administer. And it ought to make it easy for poor households to increase their own earnings without constantly worrying about how that might impact their benefit entitlements and their net incomes.

Each household is assessed for eligibility on its gross income, much as current income taxes are assessed. Households with no other income get paid the maximum possible amount for their type and size of household (eg more children generally means more cash). And that is paid by the tax authority as a negative income tax - ie instead of money being deducted from their pay packet, a payment is made directly to the family.

Households with some income of their own get scaled back from the maximum, according to an agreed and explicit "taper rate". And depending on the taper rate, at some level of own income, households lose all entitlement to a negative income tax payment.

Now, Milt's original proposal envisaged that the taper rate would be the same as the standard rate of income tax. So as a household's own income increased, their negative income tax receipt would run smoothly into an income tax payment - they'd hardly notice the join, and the whole scheme would be very cheap to administer. In fact, in its simplest form, the NIT idea has often been combined with a flat tax - ie a single rate of income tax no matter how high your income. As in this neat chart:

Unfortunately, given the existing level of welfare benefits a NIT will have to replace, such simplicity is not currently an affordable option. Which is why the TPA proposal envisages a taper rate for the NIT at 55%, rather than the 31% standard rate of income tax plus National Insurance.

OK, is that any clearer? If not, there's more here.