I have been pointed to this piece of blithering idiocy about the construction of the welfare state
I do wish people would think before making grandiose statements about political and economic matters.
On Newsnight last Wednesday, a very sharp old lady nailed Conservative minister David Willetts during a discussion on pension reforms by challenging the idea that we can’t afford to maintain the welfare state today when we could afford to construct it from scratch in the immediate, crushingly-indebted aftermath of World War II. It’s a question I’ve heard before – and one I’ve raised on many occasions. But hearing this game old woman raise it with such fire set me thinking even harder about it. Being weird that way – no, being OUTRAGED enough – I’ve spent most of the day and evening into the early hours researching, considering and assessing that challenge and the facts that lie behind it, and behind the counter-argument.
You needed to do rather more I\’m afraid.
The nub of the argument is that we cannot say that the welfare state is unaffordable because we used to be able to afford it so therefore we can now. Parts of this statement are true: the statement as a whole is not.
With reference to the founding of the welfare state, that post 1945 period for example. That great \”building of the NHS\”. Actually, that was the nationalisation of the extant health care system. Something which is actually fairly cheap. Take lots of stuff that already exists, say the government now runs it but hasn\’t had to pay for it….you can see how this might be cheap, eh? And the NHS didn\’t actually build any new hospitals until 1963.
But there\’s another much more important point. The early years of a welfare state are cash flow positive for the government. Think through what happens with, say, pensions. Everyone pays their higher national insurance charges in return for a pension that they\’re going to get some years in the future. This means that taxes are flowing in now but debt, if properly measured, is rising. For those taxes flowing in lead to a right to a pension in the future. The thing is of course, at some point those debts become repayable, people get to take those pensions they have paid for.
You may have noticed that we have reached this point now.
So I\’m afraid that the argument that we used to be able to afford the welfare state so therefore we can afford it now doesn\’t stand. For we can always afford the early years of one, when the taxes to pay for it are flowing in but the benefits earned under it have not yet been earned. The problem will come at some future date, when we need to pay those benefits earned.
It\’s entirely possible that the taxes will have been sufficient to pay those benefits. That money will have been put aside to pay them. That the money flowing in will have been invested to produce assets which will pay the pensions say.
But that isn\’t the system that the UK built.
Now, to be fair and honest, maybe the current welfare state is sustainable. Maybe it isn\’t. But the specific argument being used here is not a valid one, sorry but it isn\’t.
The second part, where there is a look at corporate profits and the labour share of income etc. One graph comes from Ritchie so we know that\’s wrong. But more than that, there\’s an assumption that the labour share and the profit share of income are mirror images of each other.
Which, as we know, they are not. There are four parts in the income method of calculating GDP. Mixed income (sole proprietorships and self employed income), taxes minus subsidies, labour income and profit share. Something that should be apparent from the fact that profit and labour shares do not add up to 100%. The changes in all four can be found here.
The story just ain\’t the same as what\’s being said I\’m afraid.
For example, the rise in the taxes less subsidies share: that includes VAT. Which was imposed in the mid 1970s, recall? That, in itself, is some percentage points of GDP which isn\’t in profits or labour share.
More research needed I feel.