The Government has announced that over 24 million people will soon start receiving their first personalised Annual Tax Summary from HM Revenue and Customs (HMRC), which will provide a breakdown of how each person’s annual direct tax bill (income tax and NI contributions) is spent.
The Chancellor of the Exchequer George Osborne described the measure as a “revolution in transparency” which “will show how hardworking taxpayers have to pay for what governments spend.”
The Treasury has published some illustrative examples of the annual tax summary on its Flickr account. While the pound amounts vary from taxpayer to taxpayer depending on their taxable income for the year, the pie-chart proportions are the same for everyone, as these are based on the overall proportional breakdown of total Government spend in the tax year – these proportions are then applied to the individual’s income tax and NI bill.
The Government has chosen to break the figures down into fifteen broad categories, of which ‘welfare’ is the biggest – accounting for nearly a quarter (24.5%) of the total. The fact that ‘welfare’ accounts for the largest share has been highlighted by much of the initial press coverage (e.g. Telegraph, Guardian, Express). The TUC’s general secretary Frances O’Grady has called the tax summary “propaganda”, alleging that “The chancellor is relying on the fact that many people think spending called welfare all goes to the unemployed.” (source: BBC)
So what exactly are the ingredients of the ‘welfare’ portion of the pie?
First, a description of the methodology underpinning the tax summary letter.
Where the figures come from
As explained by Treasury guidance on Gov.uk, the tax summary is based on the top-level functional breakdown of public expenditure on services (current and capital spend) set out in the Treasury’s yearly Public Expenditure Statistical Analyses (PESA) – specifically, tables 5.1 and 5.2. The PESA functional analysis is structured around the United Nations’ Classification of the Functions of Government (COFOG), which classifies public expenditure into ten standardised top-level functional categories (level 1), each with its own set of sub-categories (level 2). Additionally, PESA presents some HM Treasury-defined functional breakdowns as well as budgetary and departmental breakdowns.
If we use the ten level-1 categories from UN COFOG (with the main Treasury-defined breakdowns of categories 1 and 4) plus an additional category for the UK’s contribution to the EU, total UK public spending on services in 2013/14 looks like this:
Source: HM Treasury PESA 2014, table 5.1
By far the biggest category here is ‘social protection’, a broad category which includes cash benefits, pensions and non-cash benefits-in-kind such as social care.
The HMRC tax summary then takes these figures and rearranges them into the fifteen categories shown in the letter. According to the Treasury guidance, this is done on the grounds that “in many cases PESA uses difficult statistical language to describe what the money is spent on. So to make the tax summary easier to understand, some of the headings have been changed.” To do this it uses the following recipe:
Source: How public spending was calculated in your tax summary (HM Treasury guidance on Gov.uk, 2 Nov 2013)
In most cases this involves a straightforward transposition of PESA categories. The one exception is social protection, which for the purposes of the HMRC tax summary is broken down into two categories, the self-explanatory ‘state pension’ and the less obvious catch-all category ‘welfare’, which includes everything else under PESA’s ‘social protection’ heading.
For State Pension spend, the tax summary letter uses the OBR/DWP figure for DWP State Pension expenditure going to pensioners in Great Britain and abroad: £83 billion in 2013/14.
[Source: OBR Economic and Fiscal Outlook March 2014 table 4.28, DWP Benefit Expenditure and Caseload Tables 2014 outlook and forecast Budget 2014 table 1a. Note that this does not include the approximately £2bn spent on the State Pension in Northern Ireland.]
So we can now show total UK public expenditure in 2013/14 in each of the fifteen categories featured in the Annual Tax Summary letter – this is shown below, set alongside the personalised amounts given in the illustrative letter for a taxpayer with taxable income of £60,000. As mentioned above, ‘Welfare’ (Social protection minus the State pension) accounts for 24.5% of the total:
… which leaves the question of what ‘welfare’ consists of.
So what is ‘welfare’?
The word ‘welfare’ does not have a single universally accepted definition in the context of public expenditure. For some people, the word is associated with cash handouts for working-age people who are workless or on low incomes. Others define the term more broadly to encompass other strands of benefit expenditure, or even services provided as benefits-in-kind by the ‘welfare state’, such as the NHS, social care or free school meals. The word ‘welfare’ may also be felt by some to carry a certain stigma, whereas others may consider it neutral rather than pejorative.
The term ‘welfare’ is not a category used in PESA, nor does it feature in the UN functional classification, nor has it typically been used in other regularly published official sources of benefit data such as the DWP’s Benefit Expenditure Tables. It has however featured in the title of successive Welfare Reform Acts, all varying in scope, as well as the Welfare Benefit Up-rating Act 2013.
Crucially, the term has also been adopted in respect of the ‘Welfare Cap’, the budgetary framework introduced by the Government in March this year to control annual expenditure on all social security benefits and tax credits – with the notable exceptions of the State Pension and the ‘most cyclical elements of welfare’, namely JSA and Housing Benefit paid to jobseekers. This means that the term welfare is taking on greater salience in official analyses of social security expenditure: in particular the Office for Budget Responsibility (OBR), which is tasked with assessing the forecast trajectory of benefit and tax credit spend in line with the Welfare Cap, now publishes analyses of ‘welfare’ spending for this purpose (whereas previously it had only used the terms ‘social security benefits’ and ‘tax credits’) – see table 4.28 of the OBR’s March 2014 Economic and Fiscal Outlook and also the inaugural edition of the OBR’s new Welfare Trends report (Oct 2014).
It should be noted that in both of these publications the OBR includes the State Pension as welfare spending, and brackets it under the heading ‘welfare spending outside the cap’. This is in line with the OBR’s decision to “define welfare spending as all spending on benefits and tax credits as they appear in our medium-term forecasts” (OBR Welfare Trends Oct 2014 para 1.3, page 11). So the OBR’s analysis and the Treasury’s Tax Summary letter effectively take opposing approaches as to whether the State Pension may properly be deemed ‘welfare’.
It may also be noted in passing that even classing the State Pension as a benefit is contentious for some: the Pensions Minister Steve Webb recently remarked that while “the law refers to the state pension as a benefit and has done since the war […] our research shows it drives pensioners up the wall if you talk about claiming a benefit rather than the state pension. […] There’s a certain amount of stigma about claiming benefits, when people draw their state pension that’s not how they think of it.” (Source: ‘State pension is not a benefit, says minister’ -Telegraph 28 Oct 2014)
Crunching the numbers on welfare
Returning to our examination of welfare as defined in the Tax Summary letter, table 5.5 of the Treasury’s annual PESA publication contains a detailed thematic breakdown of the social protection category – this enables us to itemise the ‘welfare’ category presented in the letter.
We can see that a substantial proportion of social protection spend (11.3%, or 16.9% of ‘welfare’ when the GB State Pension is excluded) is in the form of personal social services, not cash payments. We can also see that unemployment benefits (JSA) account for only 2.9% of welfare. Family and social-exclusion benefits (in the form of tax credit, child benefit and income support etc) account for 26.7% of welfare, while housing benefits make up 15.7% of welfare. Even with the exclusion of the State Pension, other old-age pensions and benefits account for around 11.5% of the welfare category.
Another important point to make is that the COFOG category ‘social protection’ includes ‘pension schemes for military personnel and for government employees’ (source: UN COFOG code 10.2.0 – Old Age). In other words, it includes occupational pensions paid from public service pension schemes for retired public sector employees – a category of public expenditure which is not commonly considered to fall under the heading ‘welfare’. According to PESA (table 5.3), net expenditure on public service pensions (payments minus receipts) in 2013/14 was £9.3 billion.
The fact that ‘social protection’ extends beyond what may be commonly understood as welfare can be further illustrated by another set of PESA figures which breaks down social protection by government department. Expenditure on cash benefits, state pensions and tax credits is almost entirely met by the Dept for Work and Pensions and HMRC, plus a smaller amount by the Northern Ireland Executive (Northern Ireland Social Security Agency) and local government – however, a substantial proportion of the social protection spend set out in PESA is met by departments other than these:
All of this serves to underline the fact that the primary purpose of COFOG is to provide an internationally usable standardised functional classification that is general enough to apply to the governments of different countries for the purposes of like-for-like international comparisons, rather than to provide categorisations that can be readily transposed into the specific terminology commonly used in any particular country.
So, we can now adapt the Tax Summary letter’s pie chart to show the component parts of the ‘welfare segment’. One such possible breakdown is shown in the chart below, although other disaggregations can be applied. Recipients of the Tax Summary letter in 2013/14 can apply these percentages to their own tax and NI bill as stated in the letter.
Rod McInnes