The death of the welfare state

by Harvey Jones on 08 June 2010  |  60 comments
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With the UK spending far, far more than it earns each year, we’re running out of money to pay for the welfare state.

A lot of people moan about the welfare state, but you’d miss it if it wasn’t there. In the old days, if you didn’t have a job, or a pension, or if you fell ill, you lived in grinding poverty or ended up in the workhouse. If you fell ill and couldn’t afford a doctor, your life was blighted by sickness. People died a lot younger.

So appreciate what we’ve got, because with the UK spending far, far more than it earns each year, on top of a backlog of debts, we’re running out of money to pay for it.

Farewell to welfare

If you or I fell on hard times, we could always fall back on the state. But what happens when the state is broke? They’re finding out in Greece and Spain. And Ireland too, which last year slashed pay for state workers by between 5% and 15%, and is taking a knife to social security and healthcare spending.

The same thing will happen here, with tax hikes on top, and there’s no point blaming the new coalition government, because if it doesn’t act we will end up like Greece. The rules of the game are about to change. That means you have to change also.

Social good

The welfare state is a wonderful thing, whatever its shortcomings. It gives us the NHS, free at point of use. Unemployment and sickness benefits that stop people starving if they can’t find work. The state pension, which may not be riches, but will pay out for the rest of your life, regardless of stock market performance.

Yes, it also attracts fraud, encourages benefit dependency, is horribly complex and confusing, and costs a packet. But don’t think for a moment we’d all be better off without it.

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What a state!

The first problem is, Labour has spent all the money. But there’s a much bigger problem, just round the corner. We are all getting older. The baby boomers are set to retire and there’s a dwindling number of workers to pay their state pensions.

There are plenty of short-term solutions. We can ignore the problem. We can bulk up the workforce with immigration, but that is yet another Ponzi scheme, because one day they will retire and expect state pensions as well. Or we can follow Japan’s lead, and develop robots to look after the soaring numbers of sick and elderly.

Alternatively, state spending gets it.

The pips are already squeaking

Pension, health, unemployment and long-term benefits are all in the firing line, as are schools, roads, defence and just about everything else. Plus the retirement age will rise higher, and faster than expected.

The process is just beginning, with George Osborne’s recent £6bn spending cuts package, and the emergency budget on 22 June. You can already hear the squeals over plans to abolish the child trust fund, which involved shifting taxpayers’ money into the hands of middle class parents, and the campaign against plans to increase capital gains tax (CGT), by people who think it’s the state’s job to give second homeowners a tax break. That kind of largesse looked affordable during the boom years, not now.

We can expect VAT to rise to 19% or 20%, which will cost you money every time you go shopping. The biggest burden will inevitably fall on the middle classes, who will lose some of the estimated £31 billion worth of state benefits they now claim each year, starting with tax credits, and face tax rises to boot.

No hiding place

It’s not going to be pretty, so what can you do about it? You can burn effigies of City bankers or Gordon Brown, if it makes you feel better, but it won’t help. You could march against the cuts that affect you, but if you’re successful, the axe will only fall elsewhere.

You could emigrate, but France, Spain, Germany, Italy, Greece, the US, Japan and most other developed countries are sitting on the same demographic timebomb, and often worse. If you are planning to flee, make for emerging countries such as Brazil, India, Russia or China, which still have relatively young populations and low levels of debt. And lower wages.

Taking up the slack

I hate to be the bearer of bad news, but if the state can’t provide, you will have to do it yourself. Buy less, save more. Buy a lot less, and save a lot more.

Ah, you say, but pensions are rubbish, and you have a point. They do attract tax relief (although that is also being squeezed). Or you could choose ISAs instead. Just save, please. I’ve got friends in their 30s and 40s with iPads and no pensions. They have to change their priorities.

Ugh, you say, I can barely afford to pay my bills today, let alone save for a future pension. Fair point. Jobs are scarce, pay ain’t great, and prices are rising. You might have to brace yourself for working on to age 70, but at least you won’t be alone. More and more pensioners are doing exactly that. Some even like it.

And if you can’t help yourself, push your kids to do well at school, because getting a decent education is going to be more important than ever. This isn’t the time for slackers.

Recent question on this topic

• 1883 asks:

  Apparently 'we' owe billions to' them' .How many billions are involved, who are 'we' and who are'them'? What would happen if we simply did not pay?

  • 
    SoftwareBear answered "It depends what you're referring to. The tax payers bailed out the banks with billions. The..."
  • 
    liesarenocomfort answered "There is personal debt uk citizens owe to banks/credit card cos etc£1464bn..."
  • Read more answers

Are you getting it?

Most people don’t get it. Bankers and benefits claimants don’t get it. Civil servants earning more than the Prime Minister don’t get it. The FSA doesn’t get it (it recently paid its staff £33 million in performance bonuses despite its manifest failure to prevent the credit crunch). Public sector trade unions don’t get it. University chancellors don’t get it. Second homeowners don’t get it. Parents don’t get it (95% receive some kind of benefit). MPs clearly don’t get it (or maybe they do, as they are busy fiddling the rules in their favour). Even the Queen doesn’t get it, demanding an extra £6 million to pay her household bills.

Or maybe they do, and are desperately trying to squeeze what they can out of the system while they can.

It’s not my fault!

You can blame the bankers, capitalism, Gordon Brown, feckless single mums, the underclass, and even me if you like (just use the space below) but it won’t change anything. The state can’t afford to provide what it once did, that leaves only one person: you.