Thursday 13 December 2012

Welfare Britain can afford

By Janan Ganesh, Published The Straits Times, 12 Dec 2012

ALMOST 70 years to the day after William Beveridge published his Report Of The Inter-Departmental Committee On Social Insurance And Allied Services, British Chancellor George Osborne killed any birthday joy with a wintry Autumn Statement.

The Beveridge report inaugurated Britain's post-war welfare state and inspired imitations elsewhere. Mr Osborne is seen by many as a menace to this legacy, enforcing austerity where the great Liberal counselled munificence. Minutes before he spoke in Parliament last Wednesday, opposition leader Ed Miliband invoked another pioneer of redistribution by suggesting the Liberal Democrat wing of the coalition government was no longer "the party of Lloyd George".

The grimmer things get, the more rampant the boom in the market for romantic nostalgia.

In reality, the most sustained programme of austerity since World War II will still leave the state occupying about 40 per cent of gross domestic product, an unimaginably hefty share for anyone in Lloyd George's day. The National Health Service (NHS) and schools are both protected from cuts (as is, quixotically, the foreign aid budget). Pensioners are being spared the worst of the retrenchment.

Some people really are suffering under austerity, of course, especially those reliant on tax credits to top up their low pay. But most Britons are losing a little, and feeling the squeeze from inflation as sharply as government-enforced tax rises or withdrawn services. If the coalition really were discarding the fundamentals of the welfare state, the backlash would take noisier form than the resentful forbearance that marks the British zeitgeist.

Britain's problem is not a hasty disavowal of the post-war settlement but, if anything, a squeamish reluctance to question it.

The country thinks it is engaged in a painful conversation about the affordability of the state. In fact, it is only skirting the subject. The competing medium-term fiscal strategies offered by the "austere" Conservatives and the "Keynesian" Labour Party dominate political discourse.

But how quickly to balance the budget is actually a footling matter next to the longer-term challenge of reconciling fiscal means with ends.

The NHS alone is twice as well funded as it was in 2000 but still struggling to cover the costs that come with an ageing population and medical innovations.

Welfare spending, essentially the bill for social failure, remains the single largest item of the national budget. There are entire areas of public service, such as adult social care, which have no funding strategy to speak of.

And as the budgetary black holes expand, the conventional ways of filling them contract.

Borrowing is the most obvious. When Britain set about slaying Beveridge's "five giants" after the war - want, disease, squalor, ignorance and idleness - it was being lent money by a sympathetic US government and its own patriotic citizens. Both parties tolerated repayment in a debased currency as inflation and devaluation became increasingly familiar to the British experience. The Treasury has run budget deficits for much of the post-war period.

Today, Britain's debt is held by less indulgent foreign governments and institutional investors. Financial slackness is noticed and punished.

There are electoral constraints, too, as the fiscal crisis has contaminated the very idea of borrowing. Not even Labour entertains the notion that, once the current crisis is over, deficits can again become as common as they were in the last half century.

If habitual borrowing is not a strategy for paying for the state, then neither is counting on a spectacular and durable revival of growth as some kind of deus ex machina.

The Treasury's worst fear is that annual growth of between 1 per cent and 2 per cent is not merely the disappointing projection for the next couple of years by the Office for Budget Responsibility but the new trend rate of growth for the economy.

If so, much more is in peril than this government's electoral chances or even its vaunted fiscal consolidation. The basic affordability of welfare commitments made by the state to its people will also be in question.

And whatever dash for growth Britain is engaged in takes place in a context of fearsome global competition that would be unrecognisable to politicians in the immediate post-war period.

Britain is up against emerging economies that (at least until their middle classes start demanding generous pensions and public services) do not have to fund expensive welfare states and can set their tax rates accordingly.

Seventy years on, the benevolent thrust of the Beveridge report jars with the recent resurgence of the defining problem of economics: scarcity.

But the intellectual boldness of the document is what the age requires. Britain needs an equivalent of the report from the opposing perspective - a strategic vision of the state that seeks to gradually contain its cost by narrowing its ambition.

Like the Beveridge report, it must be a bipartisan effort and it must be treated as a grand moment. Piecemeal efforts - a speech here, an inquiry into a particular public service there - will be either ignored or crushed by the backlash.

Politicians will not be bound to accept all of its advice. The report will doubtless be misinterpreted over the years and run away from the intentions of its authors. Many will question the very need for radical change and refuse to take part in the process.

But all of this was true of the Beveridge report. The point is to confront the country with a difficult truth and shape efforts to address it. At the moment, Britain can only reassure itself that other countries in the West are even further from grasping the basic funding challenges facing their states.

As consolations go, it's not much.

The writer is an FT columnist.

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