Pensions, Universal Credit and the IMF

The IMF has been busying itself with the UK’s financial position, reported in the FT on the 10 October as “languishing close to the bottom of the international league table for the strength of its public finances (…) The UK’s poor position reflects the fact that the government owns few assets compared with other countries after a wave of privatisation in the 1980s and 1990s, but has big public debts and future pension liabilities to finance in the decades ahead.”

Considering the IMF’s role across the globe, especially in (but not limited to) developing countries, it must be tempting for the government to say, ‘but you told us to’. Indeed the change from full employment as the mainstay of public policy starting in 1976 was a direct result of the then Labour government’s acceptance of the punitive terms of an IMF loan. The IMF demanded a huge cut in public sector spending. It caused a major policy shift.

Since that period, privatisation has been the economic policy of successive governments. All the major infrastructure, utilities and manufacturing industries which had been brought into public ownership in the immediate post-war period have been sold off, as single share offers, wholesale private transfers, or partial staged transfers. And public services are following suit with the piecemeal privatisation of services and sale of public land.

The privatisation agenda and the austerity agenda have become the mainstream economic narrative. This ideology is guided by the notion that leaving the market to its own devices with minimal interference from Government will allow it to find its natural equilibrium and be positive for the economy and citizens alike.

The IMF also joined the clamour from right wing politicians and think tanks for scrapping the triple lock on the UK state pension. Quoting figures from the  Office for Budget Responsibility which suggests that public spending on health care and pensions will increase significantly between 2023 and 2043 it advised that ditching the triple lock could allow the government to make substantial savings on pensions. It also suggested that such savings could help to fund the NHS.

Last year the government announced plans to extend the retirement age to 68 which will affect millions of workers. The DWP claims that the changes will ‘save’ £74bn and aim to ‘maintain fairness between generations in line with continuing increases in life expectancy’. It claimed that ‘combined with our pension reforms that are helping more people than ever save into a private pension and reducing pensioner poverty to a near record low these changes will give people the certainty they need to plan ahead for retirement’. But a report published by the OECD in 2017 said that the British State Pension is now the worst in the developed world. Among those aged 75 and over, 18.5% have income levels below the poverty line, most of whom are women, for which the main reason was the low level of the state pension. Claims that private pensions will save the day for future generations does not alter the fact that is the State pension which provides the safety net in retirement, especially amongst low income groups.

Any claim that cuts to pensions were based on intergenerational fairness were contradicted as it was revealed that at the other end of the generational divide 4.3 million families were being left poorer by the government’s flagship policy Universal Credit. This appeared to be a cut too far even for some Tories.

According to the Resolution Foundation 3.2 million working families will lose money estimated to be about £48 per week and on top some 1.6 million working families, who currently receive benefits, will not get universal credit at all. The evidence is clear the Conservative slogan ‘work pays’ is hollow rhetoric. As the Child Poverty Action Group notes:
“While UC does represent a real advance on many aspects of the current benefits system, it has been designed against a backdrop of fiscal austerity and an increasingly dominant discourse which emphasises individuals’ responsibility for poverty. The reality is that cuts to the generosity of aspects of UC mean that it will not reduce child poverty and may even drive more children into poverty than ever before. (It) critically fails to deal with the issue of adequacy of benefits, while ignoring many of the key structural factors that contribute to child poverty.”

Universal Credit would seem to be less about making things easier for people and more about using it as a vehicle to cut the costs of social security to deliver a political agenda at the expense of lives. It is important to note also that with or without UC George Osborne’s cuts announced in 2015 would continue to have a destructive outcome for some of the poorest people in our communities.

With the Conservative flagship in doubt and Chancellor Philip Hammond’s plans to continue austerity and cuts to public spending (despite Theresa May’s assurances that austerity is over) the question is being asked where could the extra money come from to restore its credibility. Iain Duncan Smith, the architect of the scheme, has suggested that the Chancellor restore the £2bn of cuts made by George Osborne in 2015. Doubt has been cast too on his plans to cut taxes for millions, as the current economic policy has to restrict spending or increase tax in order to maintain budgetary control. In other words to keep the Universal Credit system afloat he needs either more tax or to scrap his plans to give the NHS more funding. With the concepts of balanced budgets and fiscal credibility limiting his options to pay more to Peter he has to rob Paul. Yet with the NHS on the brink of another crisis winter and in a time of economic uncertainty this would be a very bad move indeed and add to the country’s economic problems and human suffering.

The question being posed is the wrong one. In terms of delivering both adequate funding for essential public services and a level of social security income that does not impoverish those who need it, the government has the power to authorise whatever level of spending it the productive capacity of the country can support. Spending decisions should be based not only on real resource questions, but on moral questions too, in the allocation of those resources. If the pension age was maintained and the pension benefit increased and social security was either moved on to an efficient and adequate Universal Credit system or returned to being a tailored basket of payments what would be the effect on inflation (if any) and how would that best be countered? The same question would apply to the spending on public services.

Our state money system bears no resemblance at all to our own household budgets which are defined by our income and expenditure. The only measure by which any government should be judged is whether it has met the needs of its citizens to ensure their economic and social well-being by balancing the economy and not its budget. To ensure intergenerational fairness and to ensure there is no excessive private debt burden in the coming years, the government must use its spending power to maintain and improve standards of income and services. If it does not then millions of children will continue to be deprived of good, safe services and future generations can look forward to bleak prospects at the end of their working lives.

When Aneurin Bevan resigned from the government in 1951, over arguments about the budget, he said “The great difficulty with the Treasury is that they think they move men about when they move pieces of paper about. (…) It has been perfectly obvious on several occasions that there are too many economists advising the Treasury, and now we have the added misfortune of having an economist in the Chancellor of the Exchequer himself. (We should) put the Chancellor of the Exchequer in the position where he ought to be now under modern planning, that is, with the function of making an annual statement of accounts. Then we should have some realism in the Budget. We should not be pushing out figures when the facts are going in the opposite direction.”

The perspective that MMT gives into the functioning of government finances connects money with resources in a direct way. There is no question of confusing the moving of pieces of paper (or digits on a computer screen) with the effect on real lives. It’s a lesson we seem to have to learn over again. It’s time the government started to learn that too.

Intergenerational fairness improved by fiscal deficits – Professor Bill Mitchell

The rising future burden on our kids – Professor Bill Mitchell