In response to the Government’s current policies for reducing the debt generated by the previous Government’s bail-out of the banks, the Compass thinktank has published Plan B: a good economy for a good society . It’s full of good ideas: investment in renewable energy and in energy conservation; government support for new technology; the separation of retail and investment banking; a financial transaction tax; and a social investment strategy. These parts of the report are well argued.
But when the report turns to the tax and benefits system we find a suggestion that means-tested benefit rates should be raised so that people on lower incomes can receive higher incomes which they can then spend in order to stimulate the economy (p.20). The report shows no understanding of the fact that to increase the levels of means-tested benefits will still carry the disincentive effects associated with the withdrawal of means-tested benefits higher up the earnings range, thus extending higher labour market disincentives to additional sections of the workforce.
The present Secretary of State for Work and Pensions, Iain Duncan Smith, does understand these disincentive effects. That is why he proposed a single means-tested benefit to replace nearly all other means-tested benefits, and a total withdrawal rate of 55%. In the end he had to agree to a 65% withdrawal rate, but this will still reduce the total withdrawal rates for numerous households who are at present suffering from 85% withdrawal rates and in some cases 95%. There is little of the ‘plan B’ about means-tested benefits. A genuine plan B would understand that universal benefits combined with a progressive tax system successfully target money on the poor at the same time as increasing incentives and choice in the labour market.
The report asks that people should be more able to opt for shorter working hours, but the editors don’t seem to have noticed that means-tested benefits lock people into full-time employment, whereas universal benefits make part-time employment more of an option.
Plan B: a good economy for a good society offers a genuine plan B in many social policy fields. A genuine plan B in the tax and benefits field would most welcome. We would be happy to assist.