John Hemming's Web Log John's Reference Website
Saturday, April 04, 2015
  Why Jess Phillips is wrong to encourage benefits Tourism
One of the threads of the General Election debate both in Yardley and nationally is what is happening to the more vulnerable people in society.

All the vaguely rational parties (and I include part of the Labour Party in this) accept that we need to get government finances under control. The government has income (from taxes and levies etc) and spends money on services (the NHS, police etc). As it stands when the expenditure exceeds the income we have a deficit that needs to be borrowed each year. The government sells fixed term bonds which pay interest each year and then after a number of years the government pays back the capital. Each year also the government has to reborrow some money to pay of the bonds that mature in each year. If the government has a surplus (after paying interest) it can reduce the amount of debt by issuing less debt than it pays off.

The government has been benefiting from being able to reissue debt at a lower interest rate.  This has reduced the deficit an element without cutting spending or increasing tax.  It is, however, important to note that it is the interest rate when issuing debt that matters and only the debt issued at that rate has interest at that rate.  It is not like a mortgage where the interest on the debt can be changed by the creditor.

The interest rate for issuing debt is affected by a number of factors.  These include perceptions of inflation, the interest rate available from other source (bank deposits, other bonds) and of course the estimate as to how likely it is that the debt will be repaid.   As it appears less certain the debt will be repaid then the interest rate required by the creditor increases - not necessarily in an entirely rational manner, but it does.

Government debt is sometimes called sovereign debt and you can see the current rates on 10 year sovereign debt for a range of countries here. For the Eurozone countries it is particularly interesting as the factors other than risk of non-payment are otherwise essentially the same. At the time of writing the Germans have a rate of 0.2% and the Greeks 11.91%.

"The Markets" can be harsh on governments as what this really means is a lot of people who understand finance making estimates as to whether the government is competent and truthful. A government that intends to pay its debt, but has policies that mean it is unlikely to be able to do so (eg the Greeks) therefore gets punished by "the markets". It is worth noting, however, that a lot of Greeks who have money are taking it out of their country because they don't trust their own government. (Including Greek MPs with large sums of cash in Euros) It is, therefore, not surprising that other people don't necesarily trust the Greek government.

According to Wikipedia The UK as of Q4 2014 had a total debt amount of £1,510,000,000,000 and it costs £43,000,000,000 each year in interest. That is an interest rate of 2.85% and with an estimated population of 64.1 million it is a debt of £24,000 per person (including babies) and interest of £670 per year. Unlike student finance this has to be paid back.  It is real debt.  (student finance is only paid if people earn enough).  The current UK 10 year rate is 1.59% so there is a bit of room for reducing the interest.

If there is a perception that the UK is less certain to pay back the debt (note that anyone who refers to "pay back the deficit" does not understand what a deficit is) then higher interest rates will be charged.  If, for example, we were paying 10% interest it would be £151bn per annum. (once it had worked through).  Very quickly a country in that position  (with interest rates that are much higher) finds itself unable to cope and needs someone else to underwrite the debt (bail it out).  The IMF is one of the bodies that does this.  The IMF generally comes across as unpopular because it requires countries that borrow money from it to do unpopular things, but if the money was not available from the IMF then the countries would run out of money (as Greece may now do although the arrangements with the Eurozone are more complex).

It is, however, far better for a country to control its own finances and not require a bail-out rather than to fail to control its finances and then have a bail out.  That way it has a good reputation with "the markets" and can borrow money at a lower rate.

Hence it is ludicrous to not be worried about balancing the government books.   If governments have to pay more interest to the markets then they either can do less for their populations or have to raise more tax.  There is no benefit to the government or the people more generally to mess up government finances.

The underlying problem is that government policies need to be looked at from two perspectives.  One is from the impact on people.  The other is the total cost.   We cannot just spend money as if it grows on trees.  Many parties and policians ignore the total cost issue or try to solve it by waving their hands around and claiming that something will turn up.  There is some truth (but not enough for it to generally be worthwhile), for example, in the argument that government spending increases economic activity and that increase in economic activity itself reduces the deficit.  However, you cannot pull yourself up by your boot straps and the reduction in the deficit from the effect of the spending is rarely as much as the increase as a result of the spending.  (The exception is a question of avoiding economic disruption where temporary support can help.)

Welfare, whether it be pensions, means tested benefits, in work benefits, disability benefits or other benefits is important to the people who receive it.  However, the total cost has to be controlled in some way.   Although we have the AME Welfare Cap, much welfare is not cash limited per se.  We do need to respond when people encounter difficult situations and when there is a downturn we should not see people starve because a cash limit has been encountered and there is no more money available.   The IPPR have proposed changes that Labour appear to support of cash limiting Housing Benefit.  This is dangerous for the tenants who depend upon it as they could end up a lot worse off.

The Labour Party's campaign in Yardley is based upon criticising me because I am a successful businessman.   They argue that my concern about balancing the books conflicts with caring for the vulnerable.  I disagree.  If we do not balance the books we end up not having the money to care for the vulnerable.

One area of policy that is relevant to this is the Habitual Residency Rule.  As it stands someone who comes to the UK does not immediately qualify for means tested benefits.  This is because previously people used to wander around Europe funded by means tested benefits. (known as Benefits Tourism)   I do not think it is helpful to have people moving from place to place because they can get more benefits.  Moving because you can get a job is one thing, but moving because you can get more benefits means that pressure is put on public spending where people move to.

Jess Phillips has explained on a video how she was encouraging people to move from Sandwell to Birmingham to get more benefits.  She has also made it clear that there should be a number of formal exemptions from the Habitual Residency Rule.  It may sound harsh, but if there is someone in France who has a problem my view is that the French should resolve that problem.  We should not change our benefits system so they can come to Birmingham for us to solve the problem and cause us a financial problem.  France is a big country and we should not be trying to resolve their problems.   Cllr Phillips is wrong to wish to increase the amount of Benefit Tourism.

It is true if we have a Habitual Residency Rule then some people who come to the UK find that they are destitute.  They then end up potentially going to a foodbank.  However, if we abolish the habitual residency rule then we lose control of the costs - and as I said earlier the government loses control of the finance or has to make other cuts.   We should not be trying to solve all the problems all around the world.  We should make sure that we concentrate on solving the problems in the UK.

There are similar problems with Tax Credits. I have I think now persuaded the government to act on this, but I saw no benefit in encouraging people to come to this country to sell "The Big Issue". This has been happening so that people can get tax credits and get around the rules on freedom of movement by qualifying as self employed. The same thing has happened with a number of scrap metal businesses. Again this does not benefit wider society and should not happen.

I support the foodbanks.  I have been working with the Trussell Trust to try to fix the problems where people who should be supported by the state end up at a foodbank.  However, we cannot change the law to enable everyone who turns up to have benefits and thereby stop destitution as that would break our own finances.    There are problems with a number of sanctions that have been wrongly imposed, but the Habitual Residency Rule should stay.







 
Comments:
Of course, it is wrong to encourage benefits tourism (which astonishingly, appears to be what councillor Philiips is doing). But any discussion of this topic should stress what a tiny and insignificant phenomenon benefits tourism is, compared to "higher wages tourism" (and indeed "fleeing in mortal terror").
 
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