The responsibility that comes with social grants

There is nothing quite like being protested against by a bunch of long-haired, smelly people in home-crafted clothes who have never had a job, have no intention of ever getting a job, have no money to invest and no risk exposure to the financial sector, but are nevertheless attempting to burn down the offices of the people who pay the taxes which pay for the social welfare grants on which the protestors depend.

This was the experience of the Royal Bank of Scotland in London, where more than 120 people were arrested for attempting to set fire to their offices, with staff still inside, during the G20 Summit.  If pensioners who had lost their savings were protesting, that would have been understandable, but most of the vandals were unemployed welfare recipients who have never had a job and live in state housing.

The lack of social support during the original “great” economic depression of the 1930s was certainly made harder by a lack of financial support to the large swathes of people who lost their jobs.  Since then, governments around the world have fallen in love with the idea of state-supported welfare.

Welfare is political popcorn.  There is nothing quite like the vicarious thrill of giving away other people’s hard-earned cash in order to make yourself popular.

In developed nations, welfare recipients are in the minority, while middle-class taxpayers foot most of the bill as well as making up most of the voting population.  Their governments are realising that paying people to stay at home will not win elections.  Numerous efforts have been made to get people off welfare and back to work.

In the US, a major reform initiative in 1996 sought to shorten the period of welfare benefits and couple it explicitly to active job-seekers.  European countries have followed suit.

The credit crisis has severely constrained the number of jobs available but also wiped out tax receipts that could finance welfare.  New ideas ensuring that welfare be seen as short-term support, rather than long-term entitlements are likely to gain ground.

One of the most interesting, and effective, has been Bolsa Familia in Brazil.  Formalised from various diverse programs in 2003, by President Lula da Silva, the program has combined responsibility with benefits.

Money is paid directly to mothers for up to three children, on condition each regularly attends school.  The cash is paid out directly into digital debit cards via a state-owned bank.  This ensures that there is minimal corruption, and that the program is dissociated from political favouritism.  Poverty fell by 27.7% during Lula’s first term as president, and Bolsa Familia is seen as one of the more important contributors to that success.

The danger with any welfare program is that it creates an ostensible minimum wage.  People earning R1,000 a month to do nothing are likely to need a lot more than that in order to actually take a job.  This can make labour-intensive business uncompetitive and speed up the adoption of mechanisation, or even shift low-cost work off-shore.

The credit crisis has exacerbated this concern.  Ideas recognising this include paying people a short-term top-up allowance to make up for reduced pay.

Expensive social benefits often come at the cost of reduced investment.  In the 1970s, the top individual tax rate in the UK was 83% and the top 5% of taxpayers paid 25% of all taxes.  When the tax rate dropped to 40% in the 1980s, the top 5% contributed 40% of state revenue.  Lower tax resulted in greater investment.

All things to be considered as the new South African government considers implementing a dole system for two million of the country’s unemployed.  That will see only 5.5 million taxpayers financing the costs for 15.4 million welfare recipients.

How long do you thing that can be sustained before businesses collapse under the weight of their tax liabilities?