The debate over Philip Hammond’s 2018 budget has been a powerful reminder that, despite Brexit, tax and benefits are still central to contemporary British politics. In the face of restive Tory backbenchers, the Chancellor used an unexpected £12 billion improvement in the public finances to raise the personal income tax allowance to £12,500 and the higher rate threshold to £50,000 – delivering a manifesto pledge a year early – and to improve the generosity of Universal Credit. Rapid microsimulation analysis by the Institute for Fiscal Studies and the Resolution Foundation has pointed out that the initial cost and distributional effects of the Universal Credit changes will be outweighed by the income tax cuts, suggesting that the overall impact is likely to be regressive. The Labour Party’s opposition, however, has been blunted by John McDonnell’s decision to accept the increase in the higher rate threshold, prompting a rebellion by 20 Labour MPs who went through the lobbies with the Liberal Democrats to vote against it.
Redistribution from rich to poor through the tax and benefit systems has become the central instrument of egalitarian policy in twenty-first century Britain. Despite recent welfare cuts, the British government spends almost £100 billion a year (or 4.5 per cent of GDP) on transfer payments to working-age adults and children, mostly through tax credits, Housing Benefit, and disability benefits. Universal Credit is designed to rationalise this complex system of support by merging tax credits and other means-tested benefits into a single working-age benefit. Yet cash transfers have not always been so important. The period between the Second World War and the 1970s is often remembered as an era of unprecedented equality, in which the Gini coefficient for post-tax income fell from 0.43 in 1938 to 0.36 in 1949 and 0.32 in 1976, but this largely reflected the distribution of market incomes – which were more equal in the UK than in almost any other western country by the mid-1970s. The social security system was dominated by National Insurance benefits for pensioners and the unemployed, and income tax revenues (though more steeply progressive than they are today) were almost entirely used to finance collective services such as health, education, defence, transport, and council housing. Over the past decade, social democratic thinkers such as Jacob Hacker and Martin O’Neill have called on western governments to reverse the growth of market inequality by challenging concentrations of corporate power, curbing excess profits, and strengthening workers’ bargaining power in the labour market. The introduction of the National Living Wage in 2016 represents an important first step in this ‘pre-distributive’ direction.
Redistributive Market Liberalism suggests that poverty and inequality are best alleviated through income transfers rather than through direct intervention in labour and product markets.
Why did cash benefits become the instrument of choice for British social policy-makers between the 1970s and the 2008 financial crisis? At first glance, the growth of redistribution in an age of neoliberalism appears paradoxical, as Margaret Thatcher’s visceral hostility towards ‘welfare dependency’ is well known, and the Conservative and New Labour governments of the 1990s and 2000s followed in her wake in preaching the virtues of self-reliance and work. Part of the growth in social security spending can be attributed to rising ‘demand’ as a result of deindustrialisation, mass unemployment, and ‘new social risks’ such as changing family structures, but this cannot account for all of it. The scale of cash transfers has also been driven upwards by a series of discretionary policy choices which sit uncomfortably with perceptions of neoliberalism as a small-state doctrine associated with low taxes and low public spending.
In a new article in Political Studies, I argue that the growth of the UK’s ‘transfer state’ should be seen as the product not only of economic and demographic change, but also of a particular way of thinking about social policy which John Kay has labelled ‘Redistributive Market Liberalism’ (RML). Where other approaches to social justice focus on wage bargaining, contributory insurance, and social services, RML suggests that poverty and inequality are best alleviated through income transfers rather than through direct intervention in labour and product markets. The emergence of this philosophy can be traced to the intersection of mainstream neoclassical microeconomics with the particular Anglo-American tradition of ‘poverty knowledge’ identified by the sociologist Alice O’Connor, which focuses on measuring and alleviating income deficiency. That conjunction reached its apogee in New Labour’s child poverty strategy, which sought to reduce the proportion of children living in households with incomes below 60% of the median – the most explicit distributional target set by any British government.
The centrality of wage bargaining to the UK’s post-war settlement reflected the ascendancy of the Fordist manufacturing employment model during the middle decades of the twentieth century and the trade union movement’s deep suspicion of wage supplementation. Jack Jones of the Transport and General Workers’ Union, for instance, argued that using benefits to top up low earnings would ‘make virtual State pensioners of hundreds and thousands of ordinary, healthy men and women’ and was ‘not a valid alternative to applying consistent, vigorous pressure on employers’ to pay a living wage. Post-war wage politics was also underpinned by distinctive forms of academic expertise – Keynesian macroeconomics, the ‘Oxford school’ of industrial relations, and research by sociologists such as Richard Titmuss and Peter Townsend – which highlighted the role of social institutions in structuring economic behaviour. Yet the trade unions’ pursuit of a living wage through collective bargaining with employers was always questioned by some neoclassical economists, who believed that the labour market – like any other market – would allocate resources most efficiently if wages were set by the interaction of supply and demand. Milton Friedman and George Stigler, for instance, argued in the 1940s that the government should establish a minimum income floor by means of a negative income tax rather than through wage regulation or support for collective bargaining. The ‘Liberal-Socialist’ economist James Meade agreed that the ‘Welfare State’ approach to social equality was allocatively superior to ‘the Trade Union-Minimum Wage method’, though he sought to combine it with death duties and education reform to create a genuinely ‘Property-Owning Democracy’. Neoliberal activists such as Arthur Seldon of the Institute of Economic Affairs also took up the idea of a minimum income floor as a way of privatising the welfare state. Seldon argued that redistribution would ‘ease the introduction of pricing into government services’ such as health and education, and so make it possible ‘to shift them into the market’.
The influence of RML can be traced in the record of the Conservative governments of 1951–64 – particularly the abolition of food subsidies and the partial deregulation of rented housing – but it came into its own with the ‘stagflation’ and industrial disputes of the 1970s. High levels of inflation undermined the social legitimacy of the unions’ focus on pay and helped to rehabilitate the neoclassical analysis of the labour market; indeed, even social democratic economists such as James Meade and Richard Layard suggested that wage rigidities and trade union power were contributing to rising unemployment. At the same time, the growth and professionalisation of poverty research in Britain – begun by Peter Townsend and Brian Abel-Smith in the 1960s and taken forward by applied economists such as Tony Atkinson at LSE – focussed attention on households with incomes below the ‘poverty line’ (measured in relation to Supplementary Benefit scales and, later, at 60% of median equivalised household income). Although most British poverty researchers were Labour supporters, household-level analysis invariably revealed a weak link between low pay and income poverty. An influential background paper on The Causes of Poverty (1978) for the 1974–79 Royal Commission on the Distribution and Wealth, for instance, thus concluded that ‘the main weight of policy has to be placed on the transfer and tax system’. This tendency was reinforced by the wave of interest in distributive justice which John Rawls sparked among political philosophers. Rawls’ famous ‘difference principle’ – that inequalities were only justified in so far as they benefited the least advantaged – was often crudely (mis)conceptualised in income terms, and he explicitly suggested in A Theory of Justice (1971) that the state should use a negative income tax to establish an income floor outside the labour market.
Cash transfers to low-paid workers fitted more comfortably with New Labour’s commitment to labour-market flexibility, service-sector employment, and low inflation.
The Conservative governments of 1979–97 were not, of course, enthusiastic about redistribution; indeed, they reduced the progressivity of the tax system by cutting income tax rates for high earners and repeatedly sought to rein in social security spending. At the same time, however, Tory ministers and Whitehall officials also recognised the potential value of the benefit system in defusing opposition to market liberal reforms which were likely to impose losses on lower-income households. Housing minister Sir George Young, for instance, pointed out that Housing Benefit would ‘underpin market rents’ and ‘take the strain’ of the reduction in council house subsidies. In similar vein, the Central Policy Review Staff argued that a more generous system of in-work benefits could help make labour-market deregulation more acceptable by ‘breaking the linkage in the public mind between low pay and family poverty’. This logic informed the rationalisation of means-tested benefits in Norman Fowler’s 1984–5 social security reviews and the replacement of Family Income Supplement (which had been introduced by Edward Heath in 1971) with the more generous Family Credit. By 1997, more than 2.8 million working-age households were claiming Housing Benefit and more than 700,000 were receiving Family Credit.
If the expansion of transfer payments under the Conservatives was reluctant and defensive, New Labour’s embrace of RML was much more proactive, as the Treasury turned Tony Blair’s 1999 pledge to abolish child poverty by 2020 into an explicit set of relative poverty targets. Although Gordon Brown publicly presented tax credits as a welfare-to-work measure, he privately recognised that they also provided a powerful instrument of redistribution to low-income families. Decomposition analysis by Richard Dickens suggests that the reduction in child poverty between 1997/98 and 2008/09 was driven almost entirely by increases in tax credits and other benefits, with changes in wages and work patterns making a negligible contribution. In particular, the National Minimum Wage – which had become a flagship Labour commitment under Neil Kinnock’s leadership in the early 1990s – was introduced in 1999 at a rate of just £3.60 an hour. Cash transfers to low-paid workers fitted more comfortably with New Labour’s commitment to labour-market flexibility, service-sector employment, and low inflation.
Evidence from the British Social Attitudes Survey, however, suggests that public support for RML is limited. Although more than 75% of respondents have consistently said that the gap between high and low incomes is ‘too large’, only about 40% believe that the government should solve this problem by redistributing income, as Figure 1 shows. When the 2009 survey asked Britons how the government should tackle inequality, making the tax system more progressive, raising the minimum wage, and improving education and job opportunities were much more popular options than increasing cash benefits. As Will Davies has pointed out, New Labour offered workers in the party’s old industrial heartlands ‘“redistribution” but no “recognition”’. Cash transfers may lift households above the poverty line, but they cannot provide ‘the dignity of being self-sufficient’.
This deep cultural preference for earned over unearned income may help explain the turn away from redistribution which has taken place since 2010. In an era of slow growth and weak tax revenues, public attitudes towards ‘welfare’ have hardened and the Treasury has turned to benefit cuts as a means of reducing the deficit. Not only was George Osborne’s rhetorical assault on ‘shirkers’ and ‘scroungers’ effective politics, but the headline distributional measures which he adopted from his rivals – the £10,000 tax threshold proposed by the Liberal Democrats and the higher minimum wage championed by Ed Miliband – have both served to reduce dependence on in-work benefits. Despite the popularity of the National Living Wage, however, the prospects for achieving social justice through ‘pre-distribution’ remain uncertain. Rebalancing housing spending ‘from benefits to bricks’ is likely to be a costly and protracted process, while further increases in the minimum wage run the risk of damaging low-skilled employment and exacerbating the disruptive effects of automation. For all its faults, the redistributive apparatus of the ‘transfer state’ is thus likely to remain at the heart of British public policy.