Download Rt Hon George Osborne MP HM Treasury 1 Horse Guards Road

Rt Hon George Osborne MP
HM Treasury
1 Horse Guards Road
London
SW1A 2HQ
Scottish Association
of Citizens Advice Bureaux
1st Floor Spectrum House
2 Powderhall Road
Edinburgh
EH7 4GB
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Dear Chancellor
0131 550 1000
0131 550 1001
[email protected]
www.cas.org.uk
www.adviceguide.org.uk
I write on behalf of the Scottish Citizens Advice Service to urge you not to make any
more cuts in benefits or policy changes that will result in a reduction in benefits or
income in your Budget next week.
The cuts you have already made, alongside many policy and legislative changes
introduced, are having and will continue to have a damaging impact on the people of
Scotland, both those in direct receipt of benefits and those in the wider economy
where those benefits are being spent. This is a point that Citizens Advice Scotland
has made since the Welfare Reform Bill was first introduced. It is a point backed by
the Centre for Local Economic Strategies amongst others.
Neil Couling, director of working age benefits at the Department for Work and
Pensions confirmed to the Scottish Parliament Health and Sport Committee in
November 2011 that Scotland’s share of the UK’s reduced benefits spending would
be £2.5 billion. With the addition of the Welfare Benefits Up-rating Bill which will cut
benefits further, this rises to £2.7billion - with half of the benefit cuts falling on
disabled people and their families.
The result of all these changes and the loss in personal income will have a direct
impact on local economies and the people who live in them. As benefit payments,
and therefore spending power, is reduced, the money being spent within local
economies across Scotland will decrease also; with what could be very damaging
consequences to those whose jobs rely on wider spending power within those
communities they are based in.
Benefit cuts reduce the incomes of low income families causing fiscal hindrance;
there is a decrease in consumer spending causing cuts in businesses in the form of
job losses and closures which perpetuates the problem. This all results in reduced
taxes, NI payments, lower VAT revenues, and increased person debt, which
increases the spiral of decreasing money in the wider economy and increasing those
in need of benefits.
Patron
Chair
HRH The Princess Royal
Dominic Notarangelo
The Scottish Association of Citizens Advice Bureaux – Citizens Advice Scotland
(Scottish charity number SC016637)
Scottish Association of Citizens Advice Bureaux trading as Citizens Advice Scotland is
a Company Limited by Guarantee No. 89892
Registered Office 1st Floor Spectrum House 2 Powderhall Road Edinburgh EH7 4GB
In previous autumn statements you have announced changes that have had a
damaging impact on those affected. The Welfare Benefits Up-rating Bill announced
in the last autumn statement will affect 30% of all households. The previous year’s
changes in the eligibility rules for Working Tax Credit and Child Tax Credit impacted
on 105,000 low income Scottish families.
The UK government predicts that unemployment will remain at the peak of 8%
during 2013 yet the value of unemployment benefits has fallen from 21% of average
earnings in 1979 to just 11% in 2010. This along with the other cuts that have been
made and that are to be introduced, eg the under-occupancy penalty and the
introduction of PIP, will all play a major part in pushing people –and families - into, or
further into, poverty. At the same time as these cuts are being introduced, living
costs are spiralling. Since 2004 energy costs have risen by 100% and over the last
five years, food costs have risen by more than 30%.
This all contributes to a downward spiral effect on the wider economy. The multiplier
effect of benefits has been well documented by economists with evidence showing
that cuts to benefits take more money out of the economy, and therefore pushes
economies into recession and deficit. Economists suggest that the economic
multiplier for income transfers to low income families can be a ratio of 1.6.8. This
means that for every pound transferred in this way, GDP increases by £1.60. Equally
a cut will reduce GDP and depress economic output with economists suggesting that
the fiscal multiplier for cuts is between 0.9 and 1.7 – both much higher than your
figure of 0.5.
The IMF in 2010 stated that government spending and targeted transfers - benefits have the largest multiplier effects. Therefore in a recession targeted transfers in the
form of tax credits, social security, and other benefits act as automatic stabilisers in
that they boost the incomes of agents in the economy to stabilise consumption and
keeping the economy going. The IMF points out that consumption effects are larger
when there is a significant share of “hand to mouth households” which is definitely
what thousand of clients who come to our bureaux now are.
Economies that increase welfare payments are able to recover faster. Families with
low income spend money which stimulates the economy by boosting demand and
supporting businesses. Therefore any further cuts being made will affect the overall
economy and local businesses. I am sure that you are well aware of the opinion of
many bodies on this subject, but I append a small selection of quotes below from the
IMF and other organisations for your information.
This includes evidence from US economists Douglas W Elmendorf & Jason Furman
who state: ‘policymakers should ensure that money ends up in the pockets of
families that are most vulnerable in a weakening economy. Fortunately, these two
goals are complementary, because the families that most need the money are also
the most likely to stimulate the economy by spending it quickly..... If these families
receive additional money, in the form of tax cuts or transfer payments, they are likely
to spend it—helping to protect them from the downturn while increasing aggregate
economic activity.’
Therefore for the protection of individuals and families reliant on benefits, and for the
benefit of both local economies as well as the national economy, I urge you not to
cut benefits any further and to reconsider the current policies that will see thousands
of people lose benefit payments they rely on to live and which go back into the
economy to increase jobs and spending elsewhere.
Yours sincerely
Margaret Lynch
Chief Executive Officer
Evidence
US Nobel economist Joseph Stiglitz:
“Unemployment benefits have the largest multiplier effects – cash-strapped
families spend every cent given – and meet vital social needs”
http://www.ft.com/cms/s/0/a78e69a4-e30d-11dd-a5cf0000779fd2ac.html#axzz2MgVT5LXX
International Monetary Fund
‘Spending of hand-to-mouth households responds strongly to transfer changes in all
models, while other households respond to the temporary nature of the transfer
change largely by adjusting their saving behavior.
‘Hand-to-mouth households have a much higher marginal propensity to consume out
of current income than other households. This has two implications. First, models
that have a high share of hand-to-mouth households have a higher multiplier for
general transfers (and also for taxes). Second, transfers that can be targeted to
hand-to-mouth households provide a much more powerful stimulus than general
transfers.’
http://www.imf.org/external/pubs/ft/wp/2010/wp1073.pdf
Centre for Local Economic Strategies
‘Welfare reforms are likely to have a disproportionate impact upon those areas with
higher concentrations of benefit claimants, with subsequent knock on effects for local
economy and demography.’
http://www.cles.org.uk/publications/the-cumulative-impact-of-welfare-reform/
International Institute for Labour Studies
‘One of the most effective ways of putting money into the hands of people is
conditional cash transfer schemes. During the crisis, social and cash transfers not
only assisted those in need but, by putting cash into the hands of those most likely to
spend it, helped to shore up household consumption. For this reason, countries that
strengthened their policies towards income transfers managed to recover faster than
others.’
http://www.ilo.org/wcmsp5/groups/public/---dgreports/---dcomm/--publ/documents/publication/wcms_168161.pdf):
Douglas W Elmendorf & Jason Furman (US economists)
‘From the perspective of households, policymakers should ensure that money ends
up in the pockets of families that are most vulnerable in a weakening economy.
Fortunately, these two goals are complementary, because the families that most
need the money are also the most likely to stimulate the economy by spending it
quickly.
‘The macroeconomic impact of fiscal stimulus is largest when the stimulus leads to
the largest increases in household (or business) spending. Higher-income
households are generally able to smooth their consumption over the business cycle
by reducing their saving or increasing their borrowing, so additional resources
directed to them would likely have little effect on consumer spending. In contrast,
lower-income families are more likely to be liquidity-constrained and to be forced to
cut back their consumption in hard times. If these families receive additional money,
in the form of tax cuts or transfer payments, they are likely to spend it—helping to
protect them from the downturn while increasing aggregate economic activity.
Stimulus not only boosts the spending of households receiving tax cuts or transfers
(or businesses receiving new investment incentives) but also has important indirect
effects. For example, higher household spending encourages firms to hire more
workers, which further boosts household income and spending through a so-called
“multiplier effect.’
http://www.brookings.edu/~/media/research/files/papers/2008/1/10%20fiscal%20stim
ulus%20elmendorf%20furman/0110_fiscal_stimulus_elmendorf_furman.pdf