Cutting benefits isn't as simple as they claim

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One of the metrics underpinning the argument of those seeking to reduce the costs of welfare benefits in the UK is that the number of people living in households which receive more in payments from the government than they pay in taxes has been increasing. The figures are available in this spreadsheet. There are, of course, a number of assumptions and estimates involved in any figures of this nature – how much any given household pays in VAT, for instance, is not a figure for which robust actuals exist, and can only be projected from such data as does exist. Accepting such inevitable limitations on the accuracy of the figures, the statistics show that the percentage of people living in such households has indeed risen from 37% in 1977 to around 53.3% in 2024. The simplistic conclusion that benefits are therefore too generous and should be reduced doesn’t follow, however.

Whether we should really count the state pension as a welfare benefit at all is a controversial question. Theoretically, it is (like an occupational pension) paid for by contributions from employers and employees based on salary. It is true that those contributions are not enough to pay for the pensions, and it’s also true that they are not put in a long-term fund in the same way as occupational pensions, but those are deliberate decisions taken by government – the beneficiaries can hardly be blamed for those. In any event, what the same statistics show is that over the same period, close to half a century, the proportion of pensioner households in that category of receiving more than they pay has barely moved at all. Whilst it has varied between about 84% and 94%, the net change over the whole period has been from 92.4% in 1977 to 90.1% in 2024. The two messages from that are, firstly, that the overall increase for all households referred to above is not down to pensions, and secondly, that despite the increasing prevalence of occupational pensions, pensioner households remain highly dependant on the state pension. What it is not, is an argument for reducing pensions.

It follows that the increase in the proportion of people in households which are net recipients relates to people below pensionable age. Some of those people will be employed, others will not be. The popular belief seems to be that the problem is that more people are choosing not to work but to live, instead, on benefits paid for by others. The data doesn’t support that interpretation either. In 1977, the proportion of the population of working age in gainful employment was around 71%. Since then, it has varied as the economy has been through boom and bust cycles, but it reached a high of 76.5% in the 2010s, and for the purposes of comparison with the benefits figures being discussed here, it stood at 74.8% in 2024. In global terms, that puts the UK above the OECD average. The obvious conclusion is that the growth in the benefits bill is not a result of more people choosing not to work – the popular myth is just that, a myth. Certainly, the UK could be higher up the table, but the extent to which government action aimed primarily at cutting the bill can achieve that is doubtful.

Where does that leave us? Well, part of the issue is clearly the payment of ‘in-work benefits’: topping up inadequate wages. A subsidy, in other words, to employers who are underpaying their staff. One really good way of reducing that part of the benefits bill would be for the employers concerned to pay decent wages in the first place. A company which cannot pay its staff decent wages is a company which is not economically viable. In more general terms, reducing the benefits bill doesn’t start with cutting the budget, it starts with understanding why benefits are being paid and reducing the need for them. It’s a far more complex task, which the financial axemen seem unwilling to address. Simple cuts will reduce living standards. The extent to which there is scope simply to reduce the level of benefits being paid to individuals therefore depends, ultimately, on a judgement about the living standards which we, as a community, want to set for benefit recipients. That’s a much more difficult conversation, and one which politicians seem keen to avoid.