CAN WE AFFORD IT?.

By W. MANNING DACEY

ZBENEFITS must be paid for, and a high level of benefit must mean a high level of contribution." If the Government's proposals were put into force next year, the Social Security budget at the outset would be £650 millions (or slightly less than the Government's entire tax revenue for 1929-30). In thirty years it would rise to £831 millions (or nearly as much as the Exchequer's tax receipts for 1937-8). These are big figures, and a comprehensive statement by the Chancellor on the whole finance of social recon- struction is certainly very desirable, as The Spectator urged last week. In the meantime, it is at any rate possible to place the financial burden of the new proposals in something like proper perspective.

The general finance of the scheme is set out in the accompanying table, which compares the cost of the Government scheme at various stages with our actual expenditure in 1938-9 and with the

Exchequer (or rates) Employers ... Insured persons ... Interest on funds ...

Beveridge GOVERNMENT PROPOSALS

1938-39 Proposals

Actual 1945 1945 1955 1965 1975'

£m £m £m £m km £m

212 351 352 436 506 557 66 137 115 112 110 104 55 194 168 168 165 155 9 15 15 15 15 15 342 697 650 731 796 831

Liabilities under industrial injury scheme are excluded throughout ; in 5945 these would represent km millions for employers and £9 millions For employees. In allocating contributions for 1955, 1965 and 1975, employers' share has been taken at 40 per cent, of total.

initial expenditure proposed in the Beveridge report. In any assessment of the financial burden, however, the very first step is to recognise that one cannot directly compare a pre-war pound with a post-war pound for the reason, well known to us all, that prices have risen considerably and, a present-day pound "does not go so far." Thus, on the face of it Sir William's pro- posals would have slightly more than doubled our pre-war expendi- ture on social security. In reality, his rates of benefit and contribu- tion alike assumed that prices would have risen by 25 per cent. The contemplated expenditure was thus equivalent to £558 millions at 1938 prices, or an increase of 63 per cent, on our actual expendi- ture in that year.

Today, it is no longer plausible to assume that prices will settle down at only 25 per cent. above the 1938 level. A more reasonable estimate would be for an increase of at least 40 per cent., the amount by which basic wages. in the main industries have already advanced. On this basis, the cost of the Government scheme in 1945 would be equivalent to no more than £465 millions at 1938 prices, an increase of only 36 per cent, on our pre-war expenditure in real terms. It should not be thought that this conversion of money sums into real terms is a mere academic subtlety. On the contrary, it goes to the heart of the whole problem. To say that prices have risen is only another way of saying that money incomes—the incomes out of which taxes and contributions are paid—have risen. If prices have doubled, the yield of taxes will also be doubled without any increase in rates, and a given rate of contribution will represent only half the real burden on the wage-earner or employer that it did before.

When the Beveridge report was published, a great deal of con- troversy centred on the proposed increase in employers' con- tributions. But some critics' of the scheme go so far as io suggest that the increased contributions would severely handicap our export industries, which in any case will face an uphill task in regaining lost markets and making good the prospective gap in our balance of payments. Such fears are clearly exaggerated. In 1938 the employers' contribution for an adult male employee was Is. 7d.; under the new scheme it will be 3s. id. On our assumption of a 40 per cent, rise in general prices, this is equivalent to only 2s. 3d. at 1938 prices, an increase of only

PA In industries producing for the home market it is quite eel-- that this additional cost, like any other business expense, will c passed on to the consumer in the selling prices of products. Th, admittedly cannot be done so readily in the case of exports. I can be shown, however, that the additional contribution could rk raise the cost of our exports by more than xi or 2 per cent., an an infinitesimal increase of this kind will be completely swamped h the sweeping rise in costs generally, both here and in other countrie, since 1939. At the most, the extra contribution would require a adjustment of 5 or to cents, in the dollar-sterling exchange rate

Little comment is required on the increased contributions require from employees and other insured persons. While in the aggregate these mount up to substantial sums, little real hardship should caused on this account, since in recent times by far the most senior cause for poverty has been unemployment. Sir William Beveridg has in any case shown that insured workers have in the past bee paying considerably more (5s. sod, per week) for less adequate benefits. The flat-rate basis of contribution has been criticised as a form of regressive taxation, bearing most hardly on those with the smallest incomes. But this should largely be rectified by the reduced rate for persons under eighteen and the exemptions o account of low income for self-employed workers ; and the insurance contribution is only one element in a tax-system which on balance is now reasonably progressive.

It is, however, any increase in the sums to be raised from public funds which arouses such special foreboding in a certain section of the public. Nor is this entirely without justification, since high rates of direct taxation act as a deterrent on effort and, even more important, on risk-bearing. So far as the initial cost is concerned, fears on this account are dispelled when one examines the actual amount involved. In the first year, the national Exchequer or local rates have to find £352 millions. Given a 40 per cent. rise in prices, this is equivalent to £252 millions in 1938, or an increase of £m millions on the actual amount found from public funds in 1938-9. Since total tax liabilities in 1938, according to the Budget White Paper, amounted to Li,16r millions, this could havc,been met by an increase of less than 4 per cent, in all taxes. Alternatively, it could have been covered by an increase of 6d.—to 6s.—in the standard rate of income tax, all other taxes remaining unchanged. Obviously, there is no inordinate burden here.

When one looks at the cost in the later stages of the scheme the picture is rather different. Thus, in 1975 the central government and local authorities have to find as much as £557 millions, equivalent to £398 millions at '1938 prices, or an increase of £186 millions. This would have necessitated a rise of about one-sixth in all 1938 taxes, or an increase of perhaps 2s. 6d. in the standard rate of income tax. So far, then, our conclusion must be that the expenditures contemplated for the later stages would involve quite a considerable tax burden if the national income were no higher than in 1938, but that the initial increase in expenditure would in itself hardly be noticed.

But we are not interested in social security in isolation but as part of a general post-war budget. In particular, are the new pro- posals compatible with any redu&ion in taxation from war-time levels that would be intolerably repressive in a peace-time economy? To find our answer we must make a rough estimate of the post-war national income. In 1938, taxable incomes amounted to £5,038 millions. After the war, we must reckon with having lost three- quarters of our former income from abroad. On the other hand, it is quite conservative to take into account an expansion of I21 Per cent. or 15 per cent, in home-produced output. Technical progress alone should give an increase of productivity of this order, but if desired some part of the increase may be assumed to result from a reduction in unemployment below the 1938 level or a permanent increase in the normal working population. If finally we allow for a rise of 40 per cent, in prices and add in Ei,too millions of transfer incomes*, we arrive at an estimate of post-war taxable incomes of rather more than £8,00o millions. This is only 8 per cent, less than in 5943, when taxation on the present basis yielded £3,100 millions. Since the total post-war budget should not exceed £2,30o millions, *Social Security payments, war pensions and national debt interest.

the indications are that it should be possible to reduce taxation as a hole by about one-fifth. It must be remembered, however, that out £500 millions of our present revenue is derived from Excess Profits Tax, a special war-time imposition. If this tax were com- pletely removed, the scope for reductions in general taxation (failing really spectacular increase in national income) seems extremely limited. .

At first sight, the more distant prospect would seem to be still bleaker. Fortunately, past experience justifies the assumption of a secular increase in national income of about 15 per cent, per decade, which means that by 1965 taxable incomes should have risen to £10,400 millions, and by 1975 to Li i,600 millions, without inflation. Unless this war is being fought in vain, moreover, the next twenty years should see a substantial fall in defence expenditure as an off- set to the rising cost of social security. The one really disturbing feature in the general outlook is the rising age-composition of our population. Can an ageing population be counted upon to main- tain the same growth of productivity as in the past? Provided em- ployers and trade unions alike can be induced to abandon the restrictive practices which at present impede efficiency, there is ample scope for such an increase in output, especially if the accumu- lation of capital is speeded up by a reduction in unemployment.