All spending is income to someone

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One of the simplest rules in economics is that all spending by one person or organisation becomes income for another person or organisation. I frequently wonder how well understood it is, but it is an unavoidable fact. And what applies to spending by individuals or companies also applies to governments – all public spending becomes income to someone, somewhere. The corollary is that any reduction in public spending cuts the income of someone, somewhere – the only question is who and where.

Yesterday, Kemi Badenoch told us that a government led by her would cut spending on benefits in order to increase spending on defence. Assuming that the cut and increase match pound for pound, then the overall total of money injected into the economy by the government – becoming income for others – would remain the same. What would change, though, is the who and where receiving that income. Income which previously went to recipients of benefits would instead become income for the likes of arms companies and military personnel from where it would flow into the wider economy as it is spent again. Benefit recipients lose income, armaments companies gain income. None of that is, or can be, arguable – it’s simply a statement of fact.

Unless, of course, you happen to be the leader of the Tory Party, who said that this wasn’t targeting the poorest members of society because the welfare system “doesn’t make any sense”. Now, she might actually have a point, of sorts, about whether the welfare system works as well as it should, or is targeted as well as it could be. But unless we choose to believe that most of the benefits – and therefore the savings she is proposing (although she hasn’t actually spelt them out) – are not in fact going to the poorest in society, then it is inevitably the case that cuts will reduce the income of the poorest. Badenoch’s statement is complete nonsense. But the problem isn’t just Badenoch – all those Labour ministers and politicians calling for welfare cuts are effectively proposing the same thing. The only way of avoiding that is if the reductions in benefits are matched by increases in income for the same groups from other sources.

It is a cart-and-horses issue. If those receiving benefits start receiving at least an equivalent amount of income from other sources (such as employment), then it doesn’t need government action to cut benefits spending: it will fall automatically. But if the jobs aren’t available, or the people can’t do them (for whatever reason), then a cut in benefits takes income way from the poorest. Put another way, the issue isn’t really about benefits at all (leaving aside some tinkering with the rules to better achieve the intended outcomes) – it’s an employment/wages problem. It’s a much harder problem to tackle – not least because our politicians are wedded to the idea that governments can’t actually do much because of arbitrary fiscal rules – but looking at benefits solely as a question of ‘unsustainable government expenditure’ is, however they choose to spin it, an argument for making some of the most disadvantaged in society even poorer. It could not be otherwise. We need to start in the right place, which isn’t about the benefits system at all.