A question of progress

Will the Arab Spring lead to more democracy or more state entrenchment in the Arab world?

Imagine you are an Arab country, thus not a democracy but a political economy and rentier state, and you have not seen the protests of the Arab Spring on your streets calling for greater democratic institutions, better governance, growth and inclusion within your borders, yet. You have however, seen the power of the protests and its successful domino effect at toppling dictators and their regimes all around you, within a period of a few months. So, despite your own internal stability, do you wait to see if the Arab Spring dominos lean towards you or, do you take decisive pre-emptive action to keep your population "on-side" and avoid revolt?

Now imagine that you are the richest country in the world per capita and despite the billions you have invested in recent years in economic growth, market liberalisation and diversification to help reduce reliance on your considerable oil wealth to help move your economy towards greater productivity and stability, one of the key cards you still hold is that of national wealth re-distribution. So, will the action you take to avoid protests and revolt take you closer towards democracy and liberalisation or further entrench your rentier state?

Last week, despite internal stability, a booming economy with 19.4 per cent growth and strong investment to create more capital market forces and increase private sector employment, Qatar announced a public sector pay and benefits rise of incredible proportions. With retrospective effect from 1 September, public sector employees in Qatar will receive a 60 per cent increase in basic salary, social allowance and pensions and military staff will receive a 50-120 per cent increase. This is no small Band Aid. With over 80 per cent of Qataris working in the public sector, the implications of this salary and benefits hike will be felt almost population-wide. No explicit reasons for the rises were given, though it is interesting that the military received nearly twice the rise of the public sector.

These pay rises are significant in themselves - the majority of public sector workers already receive double and treble the pay level of most private sector workers - but even more so as Qatar and their wealthy Arab neighbours have been trying to achieve more balanced economies with greater reliance on the private sector and entrepreneurship to create jobs and wealth for over a decade now. Reducing economic volatility and sole reliance on oil for jobs and stability is sound economics but so far few have had much success at this. The private sector in Qatar still employs less than 10 per cent of the Qatari workforce and increasing public sector pay may now reduce this even further.

So why raise public sector pay and benefits - are Qatar, UAE and Saudi Arabia worried that after years of stability they may now follow their Arab neighbours in overthrow? Or, as Qatar and UAE have not yet seen protests, are they rewarding their people for not revolting or buying time to reform? Who's it hurting - especially if you can afford it? Pay and pension rises in Qatar will cost around $8bn a year extra, in Saudi the extra handouts are around $130bn and in UAE, in addition to pay rises, they have also now subsidised staple foods.

Indeed, redistributing wealth in the short-term through high subsidies, salaries and pensions hikes is a rational and tactical move, and can be implemented speedily. However, in doing so, these countries risk further long-term dependency on the state. Higher salaries and benefits for public sector workers do not come without wider costs. Already in Qatar, social networking sites are full of cries of inequity and discontent by private sector workers and disadvantaged groups who have been overlooked, whereas in previous pay hikes they too were "rewarded", and how all are now experiencing demand-push inflation are retailers and services have increased their prices, to no doubt take advantage of the greater disposable income now floating in the economy. Moves to balance out the pay rises to all workers have not yet been announced but moves to counter inflation are being made.

The Arab Spring protests have been largely about a lack of jobs, opportunities, equity and equality, political and economic liberalisation, and so increasing public sector salary and benefits measures will not lead in themselves towards the stability and reforms the people are protesting for. In the long-term that requires genuine economic, social and political reconstruction and reform too.

Qatar especially has played a strong and proactive leadership role in the region and globally to show support for the Arab Spring, through diplomatic intervention in Syria and Yemen to military support for the NTC in Libya, thus showing it understands what the protesters in the region are now demanding. And President Obama back in April praised Qatar for the leadership it showed for democracy in the Middle East, but also let slip how Qatar was not itself a democracy and was making no reforms to that end.

In the long-term, all Arab policy-makers must implement strategic moves towards greater economic diversification, political and social reform to truly deliver the equity and opportunity their protesters are demanding. Oil rich states, may be able to afford many pay-rise 'Band Aids' but these are not equitable or long-term strategic or sustainable options - the oil will run out at some point - and risks harming or even reversing the sound investments already made towards economic diversification. Indeed, the few national private sector workers these countries have may now quit their jobs in hope to find more lucrative and secure public sector jobs, thereby leading to further reliance and rentier state entrenchment - not democracy.

The Arab Spring represents an opportunity and a "wake-up call" for Arab countries - that have and have not seen protests - to now accelerate reform. Moving away from the rentier state model may not be easy - and is long overdue - but all should try to avoid short-term fixes that in the long-term are unsustainable.

Zamila Bunglawala is a Visiting Fellow at the Brookings Doha Center

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Q&A: What are tax credits and how do they work?

All you need to know about the government's plan to cut tax credits.

What are tax credits?

Tax credits are payments made regularly by the state into bank accounts to support families with children, or those who are in low-paid jobs. There are two types of tax credit: the working tax credit and the child tax credit.

What are they for?

To redistribute income to those less able to get by, or to provide for their children, on what they earn.

Are they similar to tax relief?

No. They don’t have much to do with tax. They’re more of a welfare thing. You don’t need to be a taxpayer to receive tax credits. It’s just that, unlike other benefits, they are based on the tax year and paid via the tax office.

Who is eligible?

Anyone aged over 16 (for child tax credits) and over 25 (for working tax credits) who normally lives in the UK can apply for them, depending on their income, the hours they work, whether they have a disability, and whether they pay for childcare.

What are their circumstances?

The more you earn, the less you are likely to receive. Single claimants must work at least 16 hours a week. Let’s take a full-time worker: if you work at least 30 hours a week, you are generally eligible for working tax credits if you earn less than £13,253 a year (if you’re single and don’t have children), or less than £18,023 (jointly as part of a couple without children but working at least 30 hours a week).

And for families?

A family with children and an income below about £32,200 can claim child tax credit. It used to be that the more children you have, the more you are eligible to receive – but George Osborne in his most recent Budget has limited child tax credit to two children.

How much money do you receive?

Again, this depends on your circumstances. The basic payment for a single claimant, or a joint claim by a couple, of working tax credits is £1,940 for the tax year. You can then receive extra, depending on your circumstances. For example, single parents can receive up to an additional £2,010, on top of the basic £1,940 payment; people who work more than 30 hours a week can receive up to an extra £810; and disabled workers up to £2,970. The average award of tax credit is £6,340 per year. Child tax credit claimants get £545 per year as a flat payment, plus £2,780 per child.

How many people claim tax credits?

About 4.5m people – the vast majority of these people (around 4m) have children.

How much does it cost the taxpayer?

The estimation is that they will cost the government £30bn in April 2015/16. That’s around 14 per cent of the £220bn welfare budget, which the Tories have pledged to cut by £12bn.

Who introduced this system?

New Labour. Gordon Brown, when he was Chancellor, developed tax credits in his first term. The system as we know it was established in April 2003.

Why did they do this?

To lift working people out of poverty, and to remove the disincentives to work believed to have been inculcated by welfare. The tax credit system made it more attractive for people depending on benefits to work, and gave those in low-paid jobs a helping hand.

Did it work?

Yes. Tax credits’ biggest achievement was lifting a record number of children out of poverty since the war. The proportion of children living below the poverty line fell from 35 per cent in 1998/9 to 19 per cent in 2012/13.

So what’s the problem?

Well, it’s a bit of a weird system in that it lets companies pay wages that are too low to live on without the state supplementing them. Many also criticise tax credits for allowing the minimum wage – also brought in by New Labour – to stagnate (ie. not keep up with the rate of inflation). David Cameron has called the system of taxing low earners and then handing them some money back via tax credits a “ridiculous merry-go-round”.

Then it’s a good thing to scrap them?

It would be fine if all those low earners and families struggling to get by would be given support in place of tax credits – a living wage, for example.

And that’s why the Tories are introducing a living wage...

That’s what they call it. But it’s not. The Chancellor announced in his most recent Budget a new minimum wage of £7.20 an hour for over-25s, rising to £9 by 2020. He called this the “national living wage” – it’s not, because the current living wage (which is calculated by the Living Wage Foundation, and currently non-compulsory) is already £9.15 in London and £7.85 in the rest of the country.

Will people be better off?

No. Quite the reverse. The IFS has said this slightly higher national minimum wage will not compensate working families who will be subjected to tax credit cuts; it is arithmetically impossible. The IFS director, Paul Johnson, commented: “Unequivocally, tax credit recipients in work will be made worse off by the measures in the Budget on average.” It has been calculated that 3.2m low-paid workers will have their pay packets cut by an average of £1,350 a year.

Could the government change its policy to avoid this?

The Prime Minister and his frontbenchers have been pretty stubborn about pushing on with the plan. In spite of criticism from all angles – the IFS, campaigners, Labour, The Sun – Cameron has ruled out a review of the policy in the Autumn Statement, which is on 25 November. But there is an alternative. The chair of parliament’s Work & Pensions Select Committee and Labour MP Frank Field has proposed what he calls a “cost neutral” tweak to the tax credit cuts.

How would this alternative work?

Currently, if your income is less than £6,420, you will receive the maximum amount of tax credits. That threshold is called the gross income threshold. Field wants to introduce a second gross income threshold of £13,100 (what you earn if you work 35 hours a week on minimum wage). Those earning a salary between those two thresholds would have their tax credits reduced at a slower rate on whatever they earn above £6,420 up to £13,100. The percentage of what you earn above the basic threshold that is deducted from your tax credits is called the taper rate, and it is currently at 41 per cent. In contrast to this plan, the Tories want to halve the income threshold to £3,850 a year and increase the taper rate to 48 per cent once you hit that threshold, which basically means you lose more tax credits, faster, the more you earn.

When will the tax credit cuts come in?

They will be imposed from April next year, barring a u-turn.

Anoosh Chakelian is deputy web editor at the New Statesman.