So, we have Burnham’s biggest announcement to date: an overhaul of the social care system, based on NHS principles (though not necessarily in the same way we pay for the NHS). On one hand, I’m glad it is being talked about, given how poor the current setup is, and in particular how it both discriminates based on illness and how it dominates local councils’ budgets. However, I’m sceptical of this announcement, given it’ll be discussed only at the next general election, with nothing substantial beyond an announcement. Furthermore, once again we seem to have decided on a system that ignores pricing and incentives and will almost certainly run into the same issues as the NHS. As I mentioned before, an insurance-based system would be far preferable.
This week we have a links about Poland, and how it has seemingly surpassed the UK, the breaking of the welfare state, and the Chinese stock market.
- Dan Lewis writes about his experiences in Poland and how the Poles have caught up to Britain and, in many ways, have surpassed us.
- I think most of us are aware that Poland liberalised rapidly after communist rule, with major financial and education reforms. What I think is more interesting is their social policy – Poland took no Muslim refugees from the EU refugee quotas (as of 2018), but did accept Ukrainian refugees.
- A couple of things that Lewis noticed include:
the city is completely clean, everywhere you go. I remarked to my friends on the single piece of rubbish spotted in the four-day trip.
throughout every part of the city we went, we saw no obvious disorder, rough sleeping or high-street decline (eg betting shops, vape shops, bizarre concentrations of empty barbers).
the city seemed to work on a high-trust basis, the type I hear my parents describe in Britain of the ‘60s with people leaving their doors unlocked. The museum of the Warsaw Uprising had unguarded racks for coats and bags, as if no one considered they could be stolen. Similarly, going to the top of the magnificent Palace of Culture and Science, (pictured above), we bought our own ticket and headed up, with no one checking purchase, and no hovering staff to monitor health and safety.
- One of the areas where I despair with the more liberal consensus in the UK is this view that life is getting better – you are far less likely to be murdered or assaulted, etc. The problem with this is a) nobody particularly thinks that’s a high bar, b) the chance of a random attack was very low, and c) people’s day-to-day lives in the UK are clearly worse than they were a decade ago. We have bin strikes in major cities, homelessness is worse than ever, and for too many, the high streets consist of these vape shops and American candy shops that are almost certainly fronts for money laundering. Until you address these areas head on, including understanding that this needs major enforcement, not just laws, don’t expect people to be grateful.
- This piece has made me realise I need to update my knowledge on Poland. Though it is still a fair bit smaller than the UK’s economy, or France’s, it is clearly becoming a heavyweight in the EU. The UK should be cultivating deeper ties with them wherever possible.
- Re:State discuss how the welfare state was broken in Britain in this punchy piece. They start with assessing the original vision for welfare in Britain under the Beveridge model:
In other words, the individual must work where they can, and pay in so that they may take out when they can’t, with an expectation that all efforts would be made to get back into work as quickly as possible. In return, and as part of that social contract, the State should endeavour to ensure the conditions for a strong labour market in which people can participate for decent wages. The universalism of Beveridge was made possible by that contributory principle, and an expectation of full employment.
Today we have almost entirely undermined the contributory principle, with just 6 per cent of working-age spend going on benefits reserved for those whose eligibility is based on what they paid in. And for those who have paid their national insurance, and who find themselves in need of temporary aid from the system they have funded, the income replacement rate is shockingly low. Across the OECD, a single homeowner who loses their job will, at least initially, receive on average 55 per cent of their previous earnings. In the UK it is 12 per cent. That is far from a safety net, it’s a catastrophe for anyone earning much more than the minimum wage – and would leave most people asking what on earth they had paid in for.
- It’s shocking when you compare what we have now to what was envisioned. No wonder why we have such a crisis around welfare, and yet such little political incentive to tackle it.
- Beveridge’s view of universalism clearly only worked in a fairly homogeneous society that shared social obligations, particularly one that had just been through another World War. When you consider how much more individualistic we have become, and our changing demographics due to immigration, this isn’t a sustainable view to hold.
- The second part, though, about a strong labour market is still true, and it’s why Labour’s changes to employer taxes were so damaging. Further distortions, such as raising the minimum wage yet again and high levels of low-quality immigration, further damage our labour market. The record amount of 1 million NEETS should prompt a radical rethink: abolish the minimum wage (so that we are similar to most Scandinavian countries), introduce similar hire-and-fire practices that the USA has (with notably much higher wages than us and similar unemployment levels), and reduce immigration for the care sector.
To put that in context, we spend more on non-pensioner welfare payments than we do on defence of the realm, or policing our streets, or educating our children. In fact, taking that 2024-25 figure (the latest outturn figure for benefit expenditure) we spent more on benefit payments to working-age people and children than we did on the defence and schools budgets combined.
- As the article notes, the benefits system entrenches itself by incentivising dependency – better to say you have no capability at all to get the allowance, rather than risk nothing at all. This, in addition to our tax base becoming ever narrower, calls the whole system’s legitimacy into question. Luckily, Re:State shows that this is not inevitable.
But we are an outlier in the welfare implications of these since the pandemic (the period in which these trends have accelerated), with the IFS calling it “largely a UK phenomenon”. They found that of the 11 countries for which there was comparable data, eight saw a decrease in benefit claims, two saw a small increase, and just Denmark saw a notable increase – which was still less than half the rate of the UK’s increase. That implies the design of our system itself is contributing to high dependency rates.
- In their full report, Re:State note that Britain has a very low bar for incapacity benefits, and no alternative for those with temporary conditions. Furthermore, other countries such as Canada, the Netherlands, and Denmark are much more stringent about checking individuals’ needs.
- This continues into work – the report notes the Netherlands and Denmark specifically have strong incentives to encourage work in the first two years of incapacity benefit. This encourages people to get back into the workforce, without penalising them for trying to better themselves in trying times.
- Given the dire economic situation in Britain, tackling welfare is a must for any government. As Re:State note, doing so will undoubtedly create “losers”, which will have a political cost. This is probably going to be immensely tough for the Labour Party to stomach, given their inability to articulate why we need the cuts so far. But it has to be done, and perhaps the Labour Party may note that if they don’t do it themselves, it is far more likely to be done by a right-wing party who are unlikely to be as sympathetic towards benefit claimants.
- Back to China for this last link, from Richard Conrad of Dollars & Sense. Here he examines if the Chinese stock market will ever be a compounding machine, and concludes the answer is no.
- Conrad starts by examining how China set up its banking system under Deng Xiaoping. State-owned banks were created, allowing China to lend the savings pool to Chinese companies at extremely low rates. As Conrad notes, this gave Chinese companies a major advantage – their cost of capital was well below that of their Western counterparts. However, as Conrad notes:
The weakness of the Chinese non-market financial system was that the SOE banks never were equipped or gained the ability to lend money on a risk adjusted basis. The outcome is that China wasted unimaginable amounts of capital, and their banking system is sitting on mountain ranges of bad debts today. What looks like an economic miracle was, to a fair degree, massive borrowing of growth from the future.
- Indeed, the banks were never designed or incentivised to consider capital risk – it was all about relationships and fulfilling your 5-year plan. This was fine in the early years of the Chinese boom, when your return on invested capital was very high due to the lack of existing infrastructure, but increasingly, as time went on this became worse and worse.
- Conrad considers the stock market to be the same, and notes that incredibly, the market has gone nowhere for 20 years – compare that to the USA.
The stock market was a brilliant idea where they would sell shares in (mostly) SOEs and allow the people of China to buy. This provided a new source of capital for Chinese companies and shifted some of that bad debt burden onto the public. The chef’s kiss was in 2006 (look at the chart above) when they listed the big four state owned banks and shifted some of that bad debt burden onto foreigners.
- Unsparingly, the stock market has failed to compound. The underlying financial system still has no incentive to reward efficient capital allocation, and therefore the stock prices will remain stagnant. Until these banks and the wider financial system are reformed, this will continue. However, in order to do so, the Chinese Communist Party would have to recognise huge economic costs from overinvestment, and also recognise that consumption is healthy for an economy. Given Xi’s remarks about needing to suffer, this is unlikely to happen any time soon.
