Tax & Public
Spending 101

(Photograph: Ricky Thakrar)

Right, who gets all the money?

The vast majority of public spending is enjoyed by all of us, rather than specific groups. But it’s important to think about ‘when’ rather than ‘who’ — by the time you’re 60, you’ll have contributed about as much in taxes as the cost of buying a couple of houses… but you’ll already have had the equivalent of 1.5 houses spent on you. By the end of your life, you’ll be about even.

Almost all spending on welfare services benefits us when we’re children or elderly, rather than when we’re of working age. Indeed, we spend more on pensions (£143bn) than on healthcare (£130bn) — and a lot of that healthcare spending is directed to the elderly, too. Spending on education, children and families isn’t far behind (£92bn). In total, that lot makes up around half of the £700bn or so in annual public spending alone.

Yeh, but what about ‘the welfare state’?

‘The welfare state’ has a broader meaning than ‘welfare’ — it includes sending our kids to school, paying for the elderly’s groceries, and carrying out unbelievably expensive medical procedures.

Chances are that a lot of people you know earn their living from providing ‘welfare services’, so their salaries are paid from the taxes you contribute. They also contribute taxes themselves, so a load of that spending (around one-third) is very quickly recycled back again.

Ok, so how much money won’t be enjoyed by me directly?

Let’s start with the ‘big ticket’ items: £53bn is spent paying interest on public debt, £46bn on the military, and £11bn on foreign aid (for which we have a fixed target of 0.7% of Gross National Income). Whilst spending on the first two items could be reduced significantly, they do play an important part in helping create the conditions for our economy to function and grow, especially in the context of global trade.

If you’re lucky enough never to need unemployment or housing benefits (£31bn), social care for a disability, sickness or disaster such as flooding (£53bn), then you won’t benefit directly from that spending. But these relatively low amounts provide the ‘safety net’ that means we don’t have to live in fear of starvation, sickness and homelessness. This allows us to forego working sometimes in order to study, take sick leave, have children, or go on holiday without having massive savings. Looking after people in these situations is also the essence of what makes us a civilised society.

Even more crucially, the spending on those who are most disadvantaged reduces the amount that they require from public spending overall. For example, the successful Troubled Families initiative involves a dedicated person working intensively with every family member of those most disadvantaged families in order to address any crime, anti-social behaviour, addiction, skills and employment issues. This up-front investment reduces the amount of public spending required further down the line — such as through policing and detention, health and social care, and unemployment and housing benefits.

What about all the other money I spend — on tuition fees, and train fares?

Despite average university tuition fees of £8,600pa, public spending contributes another £7,600 per student per year. The total £16,200 is almost three times the average spent on a secondary school pupil (£6,000pa). By their mid-forties, university graduates are earning on average 66% more (men) or 97% more (women) than secondary school leavers. And despite their lower wages, all those secondary school leavers still contribute taxes towards graduates!

And yes, our rail system is a bit of a joke. The railways will probably always make a loss overall (Scotland and Wales receive particularly high levels of subsidy per mile travelled, due to lower population density) — but they only cost around £12bn to run (including £5bn of investment in upgrades). At the moment, those who use the railways pay a high proportion of this cost in fares (£8bn), and the rest of the cost is met by tax contributions — paying subsidies to private train operators, so they can pretend they make a profit. In 2009, East Coast Trains had to be nationalised because its private operator had decided that it wasn’t a profitable service. Over the next five years, the public sector successfully turned the company around — achieving record customer satisfaction levels, and generating £1bn in profits that the Treasury was able to use to reduce taxation and public debt. However, the government sold it back to the private sector last week, so now we’ll have to cut public services, increase tax contributions, or increase debt in order to make up for losing that profitable asset.

This is all great, but I still want to pay less tax

Hopefully all the information above has convinced you that reducing the level of welfare services provided isn’t the answer — because most of them benefit you directly at some point.

Naturally, we should continue to improve efficiency in delivering all public services, and we’ve already touched on how intiatives such as Troubled Families are reducing the amount of public spending required overall.

Some people think that efficiency is best achieved by involving the private sector, because the incentive of personal gain is great motivation to be efficient and innovative. (Competition is another aspect in encouraging efficiency and innovation, although the public sector benefits from competition as well, in some cases.) However, privatised welfare services are still paid for by taxes, and we share any efficiency gains with the private sector in the form of their profits —which are generally distributed to wealthier individuals able to invest their disposable income in shares.

The alternative route to privatisation of welfare services is to nationalise some more profitable non-welfare services like finance, energy and transport, so that we can reinvest the profits back into welfare services. Not only does this allow us to reduce taxation and public debt, but gives us more control over service standards and working practices, and offers greater resilience against shocks such as economic crises.

But perhaps a simpler solution, in the short term at least, is to shift the balance of where tax contributions come from. Taxes that most of us contribute (income tax, National Insurance Contributions and VAT) amount to £365bn — and individuals whose families are in poverty still pay income tax and National Insurance Contributions. Specific taxes — generally raised from things that are considered less productive (such as inheritance or capital gains), are harmful to the environment (petrol and vehicles), or result in higher public spending (alcohol and tobacco) — amount to £141bn. Businesses pay a relatively low £66bn in corporation tax and business rates.

This article was inspired by a letter from the UK Statistics Authority berating the government for taking liberties in preparing the Annual Tax Summaries it sent to 24m citizens, and a Storify log of an LSE lecture on welfare myths.
Special thanks go to UK Public Spending, which provided much of the data used in the article, using 2013/14 figures where possible. If you spot anything inaccurate or potentially misleading, please do ‘Leave a Note’!
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