Richard Exell

One of the claims in Iain Duncan Smith’s Twenty-first Century Welfare really annoyed me when I first read it, and it has been niggling away at me ever since:

“The welfare system has failed to tackle intergenerational disadvantage and poverty.”

I suppose the reason I find this statement so annoying is that you come across it so often – after a century of social security, we still have poverty and inequality. So obviously social security/the welfare state is a failure.

This is a claim that fails to take into account what would happen if we didn’t have the welfare state.

If you divide the population into ‘deciles’ (tenths) by how much income, the poorest get far more than the richest in both cash benefits and benefits in kind:

How much different income groups get from the welfare state, 2008/9 (£ p.a.)

	Bottom	2nd	3rd	4th	5th	6th	7th	8th	9th	Top
Cash benefits	5,267	7,536	7,807	7,794	6,255	5,107	4,128	2,964	1,982	1,627
Benefits in kind	5,874	6,748	6,072	6,061	6,208	6,075	5,022	4,889	4,452	3,727

Each income group receives a significant amount from the welfare state, but – on the whole – lower income groups receive more than higher. The end result is that we have much less poverty and inequality than we would have without the welfare state.

The next table uses the same decile groups, and looks at their average “original income” (including wages, pensions, investment income and other sources) and the ratio between the bottom decile and the top. The next row looks at their “gross income” – including cash benefits. The third category is “post tax income” – we add the direct and indirect taxes people have paid to the mix. The last row, “final income” takes into account the value of benefits in kind, mainly education and the NHS.

The effect of the welfare state on the incomes of different groups and ratio between the top and bottom, 2008/9 (£ p.a.)

	Bottom	2nd	3rd	4th	5th	6th	7th	8th	9th	Top
Original income	3,120	5,979	8,274	12,896	19,451	27,225	33,160	43,309	56,542	94,897
Gross income	8,386	13,515	16,081	20,690	25,705	32,333	37,289	46,273	58,523	96,524
Post-tax income	4,659	9,408	11,184	14,407	17,320	21,752	24,668	30,190	37,789	64,753
Final income	10,533	16,156	17,257	20,468	23,528	27,827	29,689	35,080	42,241	68,480

Ratio between the top and bottom deciles

	Ratio
Original income	30.4
Gross income	11.5
Post-tax income	13.9
Final income	6.5

As you can see, the welfare state triples the income of the bottom two deciles and cuts the ratio between the top and the bottom from more than 30:1 to less than 7:1. Yes, we could and should be doing more – ten and a half thousand pounds a year is very little to live on – but it simply isn’t true that the welfare state fails to make a difference – we need more welfare state, not less.

Note for fellow-wonks: the figures are for average incomes by decile groups (ranked by equivalised disposable income, using the modified OECD scale) of all households in 2008/09. I’ve used Office for National Statistics data for the article “The effects of taxes and benefits on household income”, 2008/9”, specifically table OECD 14 from Appendix 1.