Photo: Getty Images
Show Hide image

Has the cost of tax credits really ballooned?

Far from spiralling out of control, the increase in expenditure on tax credits is entirely expected, explains Declan Gaffney. 

As far as I can see, the government has  two main arguments for its current proposals to cut tax credits. One, which is also popular among some on the left,  is that tax credits ‘subsidise low pay’, a formulation which is vague enough to mean a number of different things of varying degrees of wrongness --see Gavin Kelly on the “saloon bar economics” of this argument here and the Adam Smith Institute here. The other, which this article addresses, is simply that expenditure has grown from not very many billions of pounds to quite a lot of billions of pounds since tax credits were first introduced, as set out in the Chancellor’s June Budget speech:  “The original Tax Credit system cost £1.1 billion in its first year. This year, that cost has reached £30 billion.”

The numbers here are rubbish, as we’ll see, but the problem with the argument is less to do with the numbers than the logic. Public expenditure programmes can grow for any number of reasons, good or bad. Simply stating that expenditure is higher now than in the past is not even the beginning of a rationale for policy  change: if it were, we would be discussing cuts to the state pension (up £35bn since 1999/2000, when tax credits were first introduced) and the NHS (up £65bn). When politicians cite expenditure growth as a rationale for cuts, the obvious question is: what led to the rise in spending? In the current debate, that question rarely seems to be raised.

Let’s get the Chancellor’s numbers out of the way before looking at the drivers of tax credit spending. The figure cited for “the first year” of tax credits is not even in real terms- it is the nominal amount without adjusting for inflation.  Worse is the fact that the figure relates only to the first six months of tax credits, as they were introduced halfway through the 1999/2000 financial year. Tim Blackwell provides an excellent account here which further shows that as people were still being moved on to tax credits over that six month period the figure cannot even be taken as giving an accurate picture of  six months expenditure under the new system, let alone of a full year.

But it gets worse. Tax credits were introduced as a (more generous) replacement for existing benefits. Over time they successively absorbed Family Credit, Disability Working Allowance and, from 2003/4, the child elements in Income Support and Jobseeker’s Allowance. Clearly the pre-existing benefits absorbed into the tax credit system need to be taken into account in looking at expenditure trends. Now the DWP produces a publication, Benefit expenditure and caseload tables, which does precisely this, giving a reasonably consistent time series for tax credits and the benefits it replaced back to 1979/80 (see chart).  This shows real terms expenditure of some £8bn on tax credits and equivalent benefits in 1999/00 and £10.5bn in the next year- which as we have seen was the first full year of tax credits. £10.5bn is what tax credits and the benefits they have replaced cost in the first full year of tax credits. £10.5bn is  not £1.1bn.

With that out of the way, let’s consider the drivers of growth using DWP’s consistent time series rather than the apples and pear comparisons used by the chancellor. As the chart shows, rather than being continuous, growth in tax credit and equivalent expenditure took place in three distinct episodes: in 2000/01, the first full year of tax credits; in 2003/4 when the system as we know it today was introduced, and in 2008/9-2009/10 when the recession hit.

In the first two of these episodes, the driver of increased spending was policy choice by governments led by Tony Blair: first to introduce tax credits, then to overhaul the system and make entitlements more generous. The 2003/4 increase in spending was very sizeable- so much so that the tax credit system we have today (for the time being) arguably really dates from 2003/4 rather than 1999/00.  Compared with the previous system, the new tax credits involved additional expenditure of over £9bn in the first year (including on benefits which were still in the course of being transferred to tax credits). This is by far the biggest change in spending on tax credits since their introduction, and it was a deliberate choice, mainly motivated (at least on the Labour government’s account) by the objective of reducing child poverty while maintaining work incentives.

This brings out the absurdity of simply citing expenditure growth as a justification for cuts.  You can’t reasonably criticise a policy decision to increase spending just on the grounds that spending actually increased: you have to challenge the rationale for the original decision- on the basis that you disagree with the objective, or that the policy was not the most effective way of pursuing it.

The last big rise in spending was with the onset of the 2008/9 recession. No surprise there: what is striking is not so much the increase as the fact that it has hardly been reversed, despite cuts and freezes to tax credits since 2010. The main explanation is falls in real wages, with real hourly earnings as of 2014 back to 2003/4 levels across most of the earnings distribution. 

(For a fuller analysis, see Steve Machin’s authoritative account here.)

This incidentally shows the vacuity of the government’s argument that the cuts will simply bring tax credit spending back to its level in 2007/8. Reducing spending now to 2007/8 levels means a much less generous system than existed then, because the system currently has to deal with higher levels of demand.

So there is no mystery about the rise in tax credit expenditure:  it was driven by overt distributional choices by Labour governments (the main factor) coupled with falls in real wages since 2007/8. The government’s approach mirrors the factors driving growth. The introduction of the National Living Wage can be seen as tackling the wage issue. But as the IFS have argued, it cannot, as a matter of simple arithmetic, completely offset the cuts to tax credits. Thus, ultimately, the government is making distributional choices, which run in the opposite direction to those made by Labour. It is those distributional choices, rather than trends in spending or lazy allegations about subsidising low pay, which should be at the centre of debate. 

Declan Gaffney is a policy consultant specialising in social security, labour markets and equality. He blogs at l'Art Social

Photo: Getty
Show Hide image

Arsène Wenger: The Innovator in Old Age

As the Arsenal manager announces his departure from the club after more than two decades, the New Statesman editor, Jason Cowley, appreciates English football’s first true cosmpolitan. 

How to account for the essence of a football club? The players and managers come and go, of course, and so do the owners. The fans lose interest or grow old and die. Clubs relocate to new grounds. Arsenal did so in the summer of 2006 when they moved from the intimate jewel of a stadium that was Highbury to embrace the soulless corporate gigantism of the Emirates. Clubs can even relocate to a new town or to a different part of a city, as indeed Arsenal also did when they moved from south of the Thames to north London in 1913 (a land-grab that has never been forgiven by their fiercest rivals, Tottenham). Yet something endures through all the change, something akin to the Aristotelian notion of substance.

Before Arsène Wenger arrived in London in late September 1996, Arsenal were one of England’s most traditional clubs: stately, conservative, even staid. Three generations of the Hill-Wood family had occupied the role of chairman. In 1983, an ambitious young London businessman and ardent fan named David Dein invested £290,000 in the club. “It’s dead money,” said Peter Hill-Wood, an Old Etonian who had succeeded his father a year earlier. In 2007, Dein sold his stake in the club to Red & White Holdings, co-owned by the Uzbek-born billionaire Alisher Usmanov, for £75m. Not so dead after all.

In the pre-Wenger years, unfairly or otherwise, the Gunners were known as “lucky Arsenal”, a pejorative nickname that went back to the 1930s. For better or worse, they were associated with a functional style of play. Under George Graham, manager from 1986 to 1995, they were exponents of a muscular, sometimes brutalist, long-ball game and often won important matches 1-0. Through long decades of middling success, Arsenal were respected but never loved, except by their fans, who could be passionless when compared to, say, those of Liverpool or Newcastle, or even the cockneys of West Ham.

Yet Wenger, who was born in October 1949, changed everything at Arsenal. This tall, thin, cerebral, polyglot son of an Alsatian bistro owner, who had an economics degree and was never much of a player in the French leagues, was English football’s first true cosmopolitan.

He was naturally received with suspicion by the British and Irish players he inherited (who called him Le Professeur), the fans (most of whom had never heard of him) and by journalists (who were used to clubbable British managers they could banter with over a drink). Wenger was different. He was reserved and self-contained. He refused to give personal interviews, though he was candid and courteous in press conferences during which he often revealed his sly sense of humour.

He joined from the Japanese J League side, Nagoya Grampus Eight, where he went to coach after seven seasons at Monaco, and was determined to globalise the Gunners. This he did swiftly, recruiting players from all over the world but most notably, in his early years, from France and francophone Africa. I was once told a story of how, not long after joining the club, Wenger instructed his chief scout, Steve Rowley, to watch a particular player. “You’ll need to travel,” Wenger said. “Up north?” “No – to Brazil,” came the reply. A new era had begun.

Wenger was an innovator and disrupter long before such concepts became fashionable. A pioneer in using data analysis to monitor and improve performance, he ended the culture of heavy drinking at Arsenal and introduced dietary controls and a strict fitness regime. He was idealistic but also pragmatic. Retaining Graham’s all-English back five, as well as the hard-running Ray Parlour in midfield, Wenger over several seasons added French flair to the team – Nicolas Anelka (who was bought for £500,000 and sold at a £22m profit after only two seasons), Thierry Henry, Patrick Vieira, Robert Pirès. It would be a period of glorious transformation – Arsenal won the Premier League and FA Cup “double” in his first full season and went through the entire 2003-2004 League season unbeaten, the season of the so-called Invincibles.

The second decade of Wenger’s long tenure at Arsenal, during which the club stopped winning titles after moving to the bespoke 60,000-capacity Emirates Stadium, was much more troubled. Beginning with the arrival of the Russian oligarch Roman Abramovich in 2003, the international plutocracy began to take over the Premier League, and clubs such as Chelsea and Manchester City, much richer than Arsenal, spent their way to the top table of the European game. What were once competitive advantages for Wenger – knowledge of other leagues and markets, a worldwide scouting network, sports science – became routine, replicated even, in the lower leagues.

Wenger has spoken of his fear of death and of his desire to lose himself in work, always work. “The only possible moment of happiness is the present,” he told L’Équipe in a 2016 interview. “The past gives you regrets. And the future uncertainties. Man understood this very fast and created religion.” In the same interview – perhaps his most fascinating – Wenger described himself as a facilitator who enables “others to express what they have within them”. He yearns for his teams to play beautifully. “My never-ending struggle in this business is to release what is beautiful in man.”

Arsène Wenger is in the last year of his contract and fans are divided over whether he should stay on. To manage a super-club such as Arsenal for 20 years is remarkable and, even if he chooses to say farewell at the end of the season, it is most unlikely that any one manager will ever again stay so long or achieve so much at such a club – indeed, at any club. We should savour his cool intelligence and subtle humour while we can. Wenger changed football in England. More than a facilitator, he was a pathfinder: he created space for all those foreign coaches who followed him and adopted his methods as the Premier League became the richest and most watched in the world: one of the purest expressions of let it rip, winner-takes-all free-market globalisation, a symbol of deracinated cosmopolitanism, the global game’s truly global league. 

(2017)

Postscript

Arsène Wenger has announced he is stepping down, less than a year after signing a new two-year contract in the summer of 2017. A run to the Europa League finals turned out not to be enough to put off the announcement to the end of the season.

Late-period Wenger was defined by struggle and unrest. And the mood at the Emirates stadium on match day was often sour: fans in open revolt against Wenger, against the club’s absentee American owner Stan Kroenke, against the chief executive Ivan Gazidis, and sometimes even against one another, with clashes between pro and anti-Wenger factions. As Arsenal’s form became ever more erratic, Wenger spoke often of how much he suffered. “There is no possibility not to suffer,” he said in March 2018. “You have to suffer.”

Arsenal once had special values, we were told, and decision-making was informed by the accumulated wisdom of past generations. But the club seems to have lost any coherent sense of purpose or strategic long-term plan, beyond striving to enhance the profitability of the “franchise”.

The younger Wenger excelled at discovering and nurturing outstanding young players, especially in his early seasons in north London. But that was a long time ago. Under his leadership, Arsenal became predictable in their vulnerability and inflexibility, doomed to keep repeating the same mistakes, especially defensive mistakes. They invariably faltered when confronted by the strongest opponents, the Manchester clubs, say, or one of the European super-clubs such as Bayern Munich or Barcelona.

Wenger’s late struggles were a symbol of all that had gone wrong at the club. The vitriol and abuse directed at this proud man was, however, often painful to behold.

How had it come to this? There seems to be something rotten in the culture of Arsenal football club. And Wenger suffered from wilful blindness. He could not see, or stubbornly refused to see, what others could: that he had become a man out of a time who had been surpassed by a new generation of innovators such as Pep Guardiola and Tottenham’s Mauricio Pochettino. “In Arsene we trust”? Not anymore. He had stayed too long. Sometimes the thing you love most ends up killing you.

 

Jason Cowley is editor of the New Statesman. He has been the editor of Granta, a senior editor at the Observer and a staff writer at the Times.