How much does it cost to give someone one pound in benefits?

Post by ~ Simon Duffy

According to the National Audit Office (NAO, 2017a) the cost of all benefits is £173.1 billion and the cost of the delivering these benefits is £6.2 billion. This means that, on the face of it, it costs £0.04 to deliver £1 in benefits. This seems quite efficient.

However things are a little more interesting than this for two reasons:

1. The real benefit delivered should be measured in term of the net cost of benefits (benefits received after tax paid).

2. The real administrative cost of the system should include the cost of the tax system that takes benefits off people.

So, although the government spends money on benefits it also takes most of that money away again in the form of taxes. In fact the poorest 10% pay more of their income in taxes than any other group, primarily in the form of VAT, Council Tax and Income Tax (Duffy, 2017). In fact it is extraordinary that the poorest are paying any income tax, because their incomes fall far below the income tax threshold, however they will have no accountants to reclaim any tax back that they’ve overpaid through PAYE.

The net cost of benefits, the cost of benefits after tax, which is what we should really consider the true cost of benefits, is approximately £27.8 billion in 2014 and it is the poorest 40% of the population who are net beneficiaries of the system (Duffy, 2017). That means to make people £1 better off the DWP spends £0.22. This is a far less impressive.

Furthermore, we should really include at least some fraction of all the tax-collection costs involved in reducing the net income of benefit recipients. Interestingly the cost of extracting over £500 billion (plus paying out tax credits) is only £3.3 billion. However this cost excludes the cost of Council Tax, which is not included in HMRC costs. Given that benefits make up about 40% of the input from HMRC, and that HMRC must also spend additional resources administering tax credits, and that there are other taxes, like Council Tax, which should also be included, then I think we can safely assign half of HMRC’s costs - say £1.6 billion - to taking money away from benefit recipients.

So, in summary:

The benefit system increases the net income of the poorest 40% of the UK population by £27.8 billion, at a cost of £7.8 billion. Which means each pound of benefit costs £0.28.

Another way of looking at this is to think about the numbers of people involved. The poorest 40% of the population is about 26 million people. That means the true benefit of the benefit system is about £1,000 per person per year.

At the same time there are 74,600 middle-class staff who run the DWP plus all those working for the private contractors commissioned by the DWP (about 50% of all DWP costs). It is not clear how many people work for the DWP indirectly, but we can estimate that the total number of staff will be in the region of 150,000. Per person the cost of a DWP employee or contractor will then be roughly £40,000 per year,

It is also striking that we spend twice as much money giving out money as we spend gathering it in. (And pro rata we spend over four times as much, as we spend on benefits less than half what we bring in through taxes.)

This data is not an argument against welfare (which is an absolute pre-condition of any decent modern society). But it surely offers support for the integration of benefits and tax and the introduction of a basic income - something which would be much more efficient to administer (Duffy & Dalrymple, 2014).

Moreover, if we were to do a more detailed analysis we would also find that most of the DWP costs are linked to giving out small amounts of money to disabled people and to people who are unemployed. For the cheapest parts of the system are the simplest and the most universal: Child Benefit and Pensions.

It is much more expensive to be mean-spirited and I suspect that the real administrative cost of unemployment or disability benefits will be of the order of £0.50 to the pound.

The administrative costs of ungenerous, complex, means-tested and overly assessed benefits are very high. The administrative costs of basic income could be very low indeed.

References

Duffy S & Dalrymple J (2014) Let’s Scrap the DWP. Sheffield: Centre for Welfare Reform

Duffy S (2017) The Politics of Poverty. Sheffield: Centre for Welfare Reform

NAO (2017a) A Short Guide to Department for Work and Pensions. London: NAO

NAO (2017b) HM Revenue & Customs 2016-17 Accounts. London: NAO

More about the author

Simon Duffy - Founder and Director of the Centre for Welfare Reform

Simon is the Founder and Director of the Centre for Welfare Reform. He speaks regularly on television and radio about the welfare state and social policy. He is best known for inventing personal budgets and for designing systems of self-directed support.