Back to the stone age at the Trades Union Congress
It's like that moment when the clocks go back, and suddenly the evenings are dark. After a glorious summer of sports and jubilees, suddenly the annual Trades Union Congress meeting is upon us and gloom spreads around.
Austerity isn't working seems to be the slogan this year. Apparently we need more government spending to boost the economy by hiring a lot more public-sector workers and raising their pay. They will then go out and build things, supply essential services, encourage business by buying stuff, and help the government by paying more taxes.
Sounds a bit like inviting in a burglar in the hope that he might spend some of the swag in your shop. Unfortunately, the money to hire more public-sector workers, and to pay them better, has to come from somewhere. The government could borrow the money, but its problem is that it is already borrowing far too much. There comes a time when your creditors reckon you are so deep in debt that you will never be able to repay everyone, so they had better stop lending to you and indeed start getting their cash back. Then you are sunk, of course, like Greece, having to offer 20%+ in the hope that a few reckless or over-optimistic folk might be daft enough to keep propping you up with loans.
So yet more borrowing does not seem a particularly safe source of money to boost public-sector employment and wages. Nor is inflation. We have had too much of that too. A rising cost of living means that people's savings and pensions do not buy as much. And rising prices also confuse businesspeople about what is actually profitable: they cannot see the 'signal' of where the real demand is from the 'noise' of prices rising all around. That gave us the financial crisis: when everything seems to be booming, people make some pretty crass bets.
Or the government could raise the money for public-sector expansion from higher taxes. Don't get me started. A sure-fire way to kill off hard work and enterprise is to slap a high tax on it. We tried that in the 1970s and we got the brain drain. Not many of us who drained out actually came back.
But why should we boost public-sector employment and wages anyway? The fact is that productivity in the public sector is dire. It has flatlined at a time when, for decades now, it has soared in the private sector. Shouldn't we be putting our money into things that are highly productive, rather than things that are not?
And it is fine to talk about downtrodden cleaners and nurses on low pay, but the fact is that the average public employee is, for a similar job, better paid, has a much better pension, takes more days off, and has better fringe-benefits and holiday entitlements, than the average private-sector worker. Private-sector workers have also been more likely to have lost their jobs over the last five years, or to have had to take cuts in hours. So why should a private-sector cleaner be expected pay higher taxes to boost the wages of public-sector cleaners?
Austerity isn't working? What austerity? Government spending is pretty well what it was five years ago in real terms. The government is reducing its borrowing a bit – that is, it is not over-spending, beyond its means, quite as much as it did before. But it is still borrowing £2.50 on every £10 it spends, and still adding to a national debt that is already at record levels.
Adam Smith once wrote that what is right for a family cannot be wrong for a great nation. One reason the economy is sluggish is that businesses and families are actually trying to cut their debt. Once bitten, twice shy. So people aren't spending as much. When people become more comfortable with the level of their household debts, they they will start spending again and growth will resume. It's just a phase we have to go through, like the hangover after a bender, before we can recover. A hair of the dog is no solution, it provides only a temporary relief but actually adds to the problem and makes recovery even harder and longer.
Why you can't trust the American poverty statistics
A nice little chart here at Cato showing how spending on food stamps has risen over the past decade.
We can see that expenditure on this anti-poverty programme has risen considerably over 12 years. In fact, if we assume away inflation and GDP growth (not quite right but close enough in this past 12 years, especially with respect to food prices) then expenditure on this programme has risen from 0.12% of US GDP to 0.56% of GDP. Call it, allowing for the uncertainty over the GDP and inflation numbers, a fourfold increase in real terms.
Now, I think it should be obvious to everyone that giving poor people a means to purchase food means that poor people are less poor. We would also assume that some who were poor before this distribution are not poor after it.
But here's the interesting question. Fully 0.5% of GDP is being given to the poor in just this one redistribution programme. What difference does this make to the number of poor in the US?
The answer is, distressingly, absolutely not one iota. By the official statistics this redistribution does not lift one solitary person up out of poverty: in fact, does not even alleviate poverty in any way recorded by the official statistics. Further, this is true of all of the major US poverty alleviation programmes. Their Section 8 housing vouchers (roughly, housing benefit), Medicaid (health care for the poor), the EITC (working tax credits). Adding these together the US spends a good 4% or more of GDP on poverty alleviation. Yet apparently it alleviates no poverty at all.
The reason being that the US, uniquely, does not count benefits in kind, nor benefits through the tax system, when calculating who is poor. They could double spending on the poor and there would be exactly the same number of poor people as when they started. In fact, in recent decades they have doubled spending on the poor. And they've still got the same number of poor people.
Just a little warning should anyone ever brandish US poverty figures at you. They're very strange indeed and absolutely cannot be taken at face value.
France provides a lesson in how not to cut a deficit
The French government seems determined to drive out its wealthiest and most productive citizens. President Hollande is striving forward with his anti-rich campaign, setting a target of raising €7.2 billion through taxes and levies on high earners, wealthy households and big corporations. Steadfastly ignoring evidence that suggests imposing high taxes on the most productive and those who are most able to move abroad will be at best inefficient, at worst ruinous, he proudly boasts of the huge revenues he expects to bring in.
One big idea is to raise the top rate of income tax for those earning above €1m p.a. to 75%. European Affairs Minister Bernard Cazeneuve defended against the notion that high earners and spenders will simply move out of the country by stating that there are ‘French bosses who are patriots’ and ‘there is a range of measures we will take in favour of business, measures that will support investment and encourage business to stay in France.’ Leaving out the odd notion that businessmen and wealth creators put patriotism above financial security, why not encourage businesses to stay by not taxing them and the people that run them? This would have the double benefit of not trying to redistribute the collected taxes into businesses that the government think are best for the people rather than those that the people think are best for the people. Cameron gleefully offered to roll out the red carpet for French ‘tax refugees’ (to which French Labour Minister Michel Spain rather weakly reposted that rolling out a red carpet over the channel would ‘risk taking on some water’).
This August, France became the first EU country to impose a financial transactions tax for publicly traded businesses with a market value above €1bn, deciding that the originally proposed 0.1% wasn’t high enough and doubling it to 0.2%. FTTs are supposed to reduce incentives to destabilise the market through speculation, but in reality increase volatility and reduce price discovery and liquidity on the market. Further, unilaterally implemented FTTs will not raise the revenues expected due to tax avoidance strategies by traders and businesses. A prime example is Sweden in the 1980s, which imposed a 0.5% (later 1%) FTT on all purchases and sales of equity. This resulted in a mass exodus of between 90-99% of Swedish traders to London and the tax was eventually abandoned as it did not raise the revenues expected.
Not only is Hollande driving out domestic productive individuals and businesses, it seems he would also like to discourage wealthy tourists from contributing to the national economy. The French Constitutional Council has approved a tax on foreigners with second homes in the country, raising capital gains tax on the sale of second homes from 19% to 34.5% and raising the rate rented home owners have to pay from 20% to 35.5%. The extra capital gains tax mirrors the tax on French residents that they pay in exchange for the social benefits they receive from the state; note that foreign homeowners will not receive these benefits, which is believed by some to make the tax discriminatory and therefore against EU law. Because of the ‘social’ nature of the tax, those affected may not be covered by the UK-France double tax treaty, which prevents individuals from paying income and capital gains taxes twice. Again, revenues collected from this move won’t be nearly as high as the predicted €50m, as foreign homeowners will just relocate elsewhere.
Other easy sources of revenue come from a €2.3bn levy on wealthy households and €1.1bn in one-off taxes on large banks and energy firms. All of this comes amid bizarre schemes such as temporarily cutting fuel taxes for three months and hypocritical policies such as bailing out ailing bank Dexia and guaranteeing the debts of non-systemic mortgage lender Credit Immobilier de France. Scapegoat policies against the wealthy might win Hollande votes from the disenchanted poor, but they won’t help them get back on their feet in the long run.
Would a third runway be 'good value' for the taxpayer?
The Department for Transport has stated that without new runways, London’s airports will be at capacity by 2030. This could put Britain at a disadvantage from not being able to deal internationally at its full potential, especially with fast-growing markets in the Far East. Heathrow, as Britain’s only hub airport, is almost at capacity already and there has been pressure on the PM from businesses, media and backbenchers supporting the building of a third runway there. It is important that government does not prevent international businesses from operating in Britain, yet it is equally important that it allows investment decisions and funding to come from private interests and that it does not encroach on the rights it is designated to protect.
The building of a third runway is all very well if BAA Ltd (or a consortium of businesses and airlines) can afford to do so itself, but it is quite another if the £10bn funding required is going to come from the taxpayer. Against the official line of his party, George Osborne said on Sunday on the Andrew Marr show that a third runway at Heathrow is an option for government funding through the Infrastructure (Financial Assistance) Bill. This Bill will come into effect in October and promises £40-50bn of state finance to go to private schemes approved by the government, can start within 12 months and, supposedly, offer good value for the taxpayer (in other words, more government welfare for private companies that offer ‘good value for the taxpayer’).
If it is decided that a third runway is to go ahead, even if it is privately funded by BAA, additional costs may hit the taxpayer. The Free Enterprise Group, made up of Conservative MPs, has supported a move to give up to £40,000 compensation to those who would be affected by noise created by the new runway. This presumably would come out of government pockets rather than being enforced on BAA.
The best solution would be to grant a private company permission to build an airport around existing transport links and infrastructure located in an area where no or minimal noise compensation would be needed. The Mayor of London has stated his support for a new hub built in the Thames Estuary. One such proposal by Foster and Partners is to build a £20bn four runway airport on an artificial island near the Isle of Grain. It would be entirely privately funded, allocating £4bn towards improving existing infrastructure. Arguably, however, demand in the area isn’t high enough and the government would end up diverting much more infrastructural spending to this to increase demand, by creating transport links and provide public services for new workers. For the same reason, building a hub airport in the north when demand is predominantly centred around London may be good politics, but would be a great risk economically. The ‘build it and they will come’ strategy is a risk that should not be taken on something as crucial as international transport links, especially if the public purse is involved.
Another possibility arises from the currently anonymous ‘world-leading infrastructure firm’ made up of a consortium of British businesses, who are currently scouting sites for a new four runway airport that they hope could rival and perhaps even replace Heathrow as Britain’s key link between domestic regions and international airports, especially in the Far East. The firm has been looking at sites to the west and north-west of London and is now in talks with Chinese sovereign wealth funds over raising the necessary capital.
With a self-appointed monopoly on the decision of where something as crucial as an airport can be built, the government has a responsibility to make a decision that will involve minimal public expenditure, follow demand and protect the citizens who elected it from having their property devalued without compensation, whichever option that may be.
Nobody would (willingly) invest in a government-run bank
I am in City AM this morning, debating with Keynes's biographer Lord Skidelsky about whether we should have a government-run investment bank, as Nick Clegg has proposed. Skidelsky says yes:
Showing the government is willing to invest in the right project would lift business expectations, and the contracts from large projects would flow down to small and medium-sized enterprise.
I'm not convinced. If a project is so risky that the private sector won't invest in it without some kind of taxpayer guarantee, it is far too risky to spend taxpayer money on. And government has different priorities to private investors, whose main aim is to make a return — bailing out 'national' industries is a political priority, which a state investment bank would only :
Four out of five start-ups end in failure – if the private sector can’t get it right, how will the government? Inevitably, a state-run bank would be used to bail out politically sensitive projects, as was Leyland Motors in the 1970s, at a cost of £12bn to the taxpayer (inflation adjusted).
Read the whole debate. For me, the bottom line is that a project that's too risky to attract voluntary investment is the last thing that taxpayers' money should be spent on. Governments aren't very good at what they do as it is — I shudder to imagine how badly they'd do at playing the market with other people's money.
Wealth taxes are immoral and counterproductive
The Deputy Prime Minister Nick Clegg says we need a wealth tax. No we don’t. A wealth tax is immoral and counterproductive.
Right now, Mr Clegg and his government should be focusing on creating wealth, not shuffling it around. We need a growth agenda of lower taxes and less red tape in order to get businesses expanding and employing people. A wealth tax, like any other kind of tax, simply shifts potentially productive resources from the private sector to the government. And governments are not usually thought of as being ‘productive’ or as ‘wealth creators’, are they?
Mr Clegg is talking about a wealth tax partly because he has a party conference coming soon and wants to give his left-of-centre members some red meat. And partly because his government can’t balance its books.
But the wealthiest 1% already contribute 30% of tax receipts: just how much of their flesh does he want? And the national debt is rising – it will rise another 40% by 2016, to £1.5trillion, at which point we will be spending around £70 billion on interest payments alone – not because the ‘rich’ don’t pay enough, but because the government spends too much. Indeed, it spends £700 billion a year, compared to just £450 billion (inflation adjusted) back in 2000. What is that extra £250 billion buying us, except waste and inefficiency?
Brains and money flee high tax countries. I know. When I graduated, the top rate of income tax was 98%, and other rates were teeth-grittingly high too. So like many others of my generation, I upped sticks and emigrated. Eventually I came back, but many others did not. And those are bright, productive people who were lost to the UK. And the effect continues. When US taxes in New York were significantly higher than those in London, thousands of US high-flyers came to London. After the Brown-Osborne ‘expat tax’, many have gone home again. A lot of them could afford the tax, but say they just don’t feel welcome any longer. And now, mobile French businesspeople are buying properties in London to escape M Hollande’ tax hikes on ‘the rich’.
We want more productive capital in the UK, not to tax it out of existence. It is immoral to tax people on their accumulated wealth anyway – and remember that most of those in the 'Rich List' have made their own money, and have not inherited it. Taxing income is one thing: people have money coming in to pay it. But if you tax the value of a house, say, the family living in it might not actually have enough income to meet the bill. You can't pay your tax bill in old masters, town houses, or share certificates. So you have to sell them. But who are the buyers? Not the rest of the population who by definition are too poor to own such wealth. So the price of assets drops. With all 'the rich' trying to sell at the same time, asset prices tumble. They have to sell even more to raise the cash, and prices tumble again. It becomes a fire sale. But it is not actually the rich who suffer most. As asset prices slide, and share prices decline, the value of people's pension funds shrinks. A wealth tax actually robs everyone of their savings, not just the wealthy.
As people’s savings shrink and they feel poorer, they are less likely to go out and spend, which the politicians want us to do in order to revive the economy. They are less likely to give to good causes and help build the Big Society. The tax is simply counterproductive. So what is in this idea, other than stupidity? The politics of envy, perhaps. As Conservative MP Bernard Jenkin put it, ‘If envy taxes made us rich, we would be a very rich country indeed.’
No war on motorists? Tell that to the world outside Central London
“Left wing think tank wants higher taxes” is a bit of a “dog bites man” story, but the IPPR’s call of higher fuel duty was spiced up by some eye-catching facts about the costs of getting about. Contrary to popular perception, they found that the price of motoring has fallen slightly in real terms in the last ten years. Ipso facto, they conclude, the “war on motorists” is a myth. “Compared to users of public transport,” says the think tank’s associate director, Will Straw, “there is no war on motorists.”
This rather depends on how you define a war and who you think is the aggressor. A breakdown of the figures (see graph below) reveals that bus and train passengers have seen fares increase well above the rate of inflation since 1987, but the costs of taxing, insuring and fueling a car have gone up by even more. If average motoring costs have not risen in real terms, it is thanks to the impressive decline in the cost of buying a vehicle which has consistently beaten inflation and is now lower in both real terms and—quite remarkably—also lower in nominal terms (as of 2010). Globalisation, a genuinely competitive free market and a relative lack of state interference have reduced prices and brought some rare good cheer to drivers.
The same cannot be said of the other costs shown, all of which are dictated by the state (in the case of fuel duty and car tax), or by cartels (OPEC), or by the half-state/half-cartel hybrid of the public transport industry. Fuel and car taxes have gone through the roof by any standard, and while motorists could be forgiven for viewing cheaper cars as a small mercy to take their minds off the looting, the IPPR sees it as justification for taking a little more.
There is no doubt that the pockets of bus and rail passengers have also been systematically picked over the past 25 years, but as high as the prices of bus and train tickets are, they do not represent the true cost of public transport. Local public transport was subsidised by the taxpayer to the tune of almost £5 billion in 2010/11, and close to £8 billion was taken from the public purse to spend on the railways (IPPR, p. 14). No government has yet come to terms with the fundamental problem that public transport is inherently expensive and can only be sustained by forcing those who don’t use it to cough up while making their customers pay twice.
The IPPR helpfully points out that motorists can reduce their expenditure by driving less. As a piece of advice, this is rather like telling commuters to save money by not travelling at peak times; technically true so long as one ignores the essential nature of the journey. They appear to be of the belief that motoring is still the preserve of wealthy Mr Toads, pootling around for fun on a Sunday afternoon, whereas private cars are by some distance the nation’s primary mode of transport.
This metropolitan bias is in evidence when the report notes that 25 per cent of the population do not have access to a car. The IPPR describes this figure as “surprisingly low”. Out here in The Provinces, we might regard it as surprisingly high. A look at the numbers reveals just how marginal public transport is to much of the population outside central London. Nationally, the average household spends £21.60 a week on petrol, diesel and motor oils, but only £2.80 a week on rail and tube fares. The average household spends more on spare parts and accessories for their cars or vans (£1.80) than they do on bus and coach tickets (£1.50). To put it still more starkly, we spend more money on lease cars than we do on bus journeys. As should be obvious, this is not because bus and train fares are especially cheap, but because the average household is considerably less likely to buy them than they are to fill up their tank. (If all these figures seem low, it is because many people use only public OR private transport, and some may not use either very much.)
For the majority of the population who rely on their cars to get about, the miracle of consumer capitalism has alleviated the pain of escalating taxes by providing cheaper vehicles, but it strains credibility to suggest that they enjoy favoured status in government policy. Whether one looks at fuel tax, car tax, bus fares or train tickets, no one escapes from the squeeze. I would be tempted to say that war is being waged on us all were it not for the fact that the cost of motoring is kept artificially high while the cost of public transport is kept artificially low thanks to the way it is subsidised by everyone—motorist, cyclist and pedestrian—whether we like it or not.
The mirage of 'affordable housing'
The publication of the Montague Report into the barriers to institutional investment in private rented homes threw up some interesting headlines. Most of the debate over the report actually seemed to concentrate on a proposal to relax local government requirements on developers to build ‘affordable housing’, as this is imposing higher costs on them as they are forced to sell at below market rates. That local government are free to do so if they wish to suggests that there may actually be some interesting reasons why they have not been doing so, perhaps related to Public Choice dynamics at work – for instance, do local governments have a vested interest in reducing development?
The housing market is a hugely complex area – the Montague Report itself is only examining a particular aspect of how to expand availability in the private rented sector. In many respects it is actually quite a sound report which, apart from this recommendation also rejects such terrible ideas as rent controls and Government guarantee schemes. As the ASI’s Ayn Rand lecture by John Allison of the Cato Institute pointed out, the latter is the route the US has gone down and it has proven disastrous. Similarly, rent controls and stricter regulation of landlords leads to less choice of housing and more landlords operating outside of the law altogether.
Confusingly, however, is what is actually meant by the term ‘affordable housing’ in the UK. In an economic sense, affordable housing usually means a comparison of house or rental prices to median incomes in a particular area. There is no doubt that the UK faces a huge problem of affordability in this sense as this report shows. However, in UK Government-speak, affordable housing actually refers to ‘social rented, affordable rented and intermediate housing, provided to eligible households whose needs are not met by the market’. What is meant, therefore, by affordable housing is nothing to do with its affordability but instead the term simply refers to availability of socialised housing. There is no doubt that this confuses the debate: when we hear the term affordable housing, it has nothing to do with affordability of that housing.
For the record, the UK has a high proportion of socially-owned housing by international standards (20%). It must also be said, however, that even a description of affordable housing related to income is arbitrary and flawed because it carries a value judgment as to how much income any particular individual ought to spend on housing as opposed to other items of expenditure or saving, as well as an arbitrary assessment of quality of housing.
It quite clear that many government efforts to provide less expensive housing (to avoid confusion) are actually not merely failing to do so but are actually counter-productive. As the Montague Report itself shows, by forcing developers to build ‘affordable housing’, local governments are hampering supply and are thus making housing less affordable! Unfortunately, the Montague Report also argues for restrictive covenants on build-to-rent housing, noting that rental and owner-occupied housing are competing for the same land. This is treating the symptoms rather than the cause, which is shortage of land for development.
A free market definition of affordable housing must ultimately be the price that consumers are willing to pay for housing. Only consumers should ultimately decide where they want to live, in what kind of dwelling and by what financial arrangement – constrained by the supply of course. Putting it simply, if a million houses were rapidly built around London, it is pretty clear that house prices would fall generally and that this would increase affordability. Even if these were a million mansions, this would still increase the affordability of housing in general. Such building cannot occur, however, due to planning constraint. As the Hilber and Vermuelen report concludes ‘Regulatory constraints imposed by the British planning system can to a large extent explain the high house prices ‘.
The real, long-term problem in the UK housing market – rental or owned – is huge-scale government intervention and distortion of the market. Whilst this has occurred in a number of areas, the constriction of the supply of housing and huge manipulation via the planning system is the most serious cause of the UK’s housing shortage, as this IEA report shows. Even relatively sensible interventions to solve this problem, such as the Montague Report and the National Planning Policy Framework are unlikely to have any substantial impact without major planning liberalisation.
HMRC's 'Tax Dodgers' list shows the absurdity of the UK's tax position
HMRC have published a rogue’s gallery of its most wanted ‘tax dodgers’. I’d better issue to a caveat before the ASI – which doesn’t have a corporate view - get accused of advocating criminality or I get arrested for inciting criminal behaviour by the (thought) Police, probably under the Terrorism Act. So, I can firmly state that I in no way condone criminality or criminal behaviour or support such individuals’ actions.
Although tax law is notoriously opaque and verbose it is quite clear that these people are criminals and have deliberately set out to commit large-scale criminal offences. That said, many otherwise law-abiding individuals are engaged in tax evasion on a daily basis, as we were recently reminded – what separates this from these most-wanted criminals is, in the eyes of HMRC, surely only a matter of degree.
Let’s look more closely at what these people have been up to. Of the twenty, eight seem to have been involved in VAT fraud, fourteen are wanted for smuggling (almost all alcohol and tobacco) and three offenders were involved in fraud using tax credits or money laundering. Unsurprisingly, avoiding indirect tax via VAT fraud and smuggling is the most popular past-time for criminals. This straw-poll is backed up by the official statistics on the ‘tax gap’ here, estimated to be around £35bn in total. The tax gap on VAT is believed to be 16%, that on duty for cigarettes 10% and beer 14% and on hand-rolled tobacco an amazing 46%. On indirect taxes the tax gap is estimated at 10.9% and on direct taxes 6.5%.
However, without getting into a debate about where the UK might be sitting on its Laffer Curves it is quite obvious that there are some very pernicious effects of our tax rates. Whilst simultaneously failing to maximising its revenue and disincentivising growth creation by law-abiding tax-payers, the UK Government is creating the perfect conditions for the growth of a criminal class. This is true both at this very high level, where criminals are encouraged to operate by such very high rates.
If VAT was, say, 2% rather than 20% would so many people be willing to undertake such risky and illegal activity – not to mention that they would probably find it easier to gain jobs in the legal economy? At the very least, such behaviour shows that we need to end the punitive campaign against smokers, drinkers and drivers: we are merely playing into the hands of criminals as we have done with the campaign against (other) drugs. Instead, I’m waiting for the day when people are willing to start smuggling butter, sugar, salt and cocoa into the country.
This problem is also true at the very mundane level of everyday tax evasion by cash payments to tradesmen – are we going to put them on a website? Or simply impose punitive fines on already hard-pressed business people, no doubt at greatest cost in administration than the actual revenues from the fines? Does such prevalence of this activity instead not indicate that perfectly law-abiding consumers and traders are anxious to avoid paying such extortionate rates of taxation. The Government has taken a grossly high-handed approach and condemning people for behaviours that they would not necessarily wish to engage in. However, if you wish to repair your roof or paint your house, it’s not surprising that people wish to avoid adding 20% to the cost (I speak as a new home-owner who has recently shelled out thousands of pounds of my already heavily-taxed income in SDLT and VAT).
We need to turn such attitudes on their head – these people are sending a clear message to government ‘we are being taxed too much’. Ignore what is said about how much we value ‘public services’ or how much the ‘cuts’ are resented. These are the true, revealed preferences of the population at large. We are paying too much tax and are being criminalised trying to get away from it. We’ve had enough.
Making society friendly again
Imagine a society in which welfare was provided not by the state, but by competing private organisations performing services such as insurance, savings, pensions, primary medical care and unemployment aid, and whose success and continuing function depended on how well they provide these services.
Welfare would be provided at a much more intimate level and would be results-orientated as consumers demanded better services with their wallets. Levels of social capital and community action would be higher, as current taxpayers would no longer feel as if they had already ‘played their part’ by paying taxes — which, in our state-centric system, are distributed ineffectively and often to rent-seekers. Participation in these societies could create a stronger feeling of ‘belonging’ among their members.
This kind of system was a reality before the birth of the welfare state, which began with Lloyd George’s provision of National Insurance in 1911 and set firmly on its path by William Beveridge’s social policy report in 1942. The ‘friendly societies’ that preceded the welfare state provided specialised welfare benefits that directed capital where its members’ values lay, in a pluralistic way that was starkly different to the monolithic approach of the modern state.
The competitive nature of these private welfare societies meant that they aimed to provide top quality service in a capital efficient way. This competitiveness also meant that there was a very large profit incentive to find cheats and strip them of their benefits, which in turn would mean more help could be diverted to the truly needy. In turn, unemployment was dealt with faster and more personally, aided by the inter-member sense of community. Further, members could choose where their money was going and join those societies that were most in line with their values.
Friendly societies still exist today, providing financial services and thriving on an ethos of mutuality, economy and community. However, they are held back from their vast potential by the nanny state that pervades our society under the guise of ‘wealth redistribution’, in reality providing an inferior service than could be achieved privately, increasing our reliance on the state and discouraging charity and community values. Many in the UK and elsewhere see state welfare provision as the backbone of our country and fervently expound its virtues, because they have never known anything else. But a look back into history shows that privately owned welfare societies worked in the past, and could work for us once again.