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The old arguments against means testing need a reality check

August 27, 2014

New report: universalism or means-testing as a solution to poverty?

Should the state concentrate resources on helping the most needy, or favour “universal” provision delivering services and even income to all citizens? For many years, progressives have proclaimed with a grin on our faces that universal provision works both ways: not  only does it provide for all, but even gets more to the poorest groups because the public cake is allowed to be far bigger overall when everyone gets a slice. Means-testing, on the other hand, has been condemned as divisive, stigmatising and a recipe for a residual state which the middle classes will let shrink.

That grin has long since disappeared. It must be obvious by now to all but the most starry-eyed observer that the voting public and the markets want the public cake to shrink, not grow, regardless of where it is spent. This makes public resource allocation more of a zero-sum game. In a review I’m publishing today with Dimitri Gugushvili, we show that earlier evidence that countries with more universalist policies are also most effective in fighting poverty, if it was ever valid (it covered a very limited range of countries), is now out of date.

This does not mean that all public resources should be targeted through means-testing. For a start, there remain crucial areas where there is consensus that a state service should be provided for everyone – especially areas where it would be very difficult even for middle-income people to make their own provision. These include school education, healthcare and pensions (the last of these may be affordable for the middle classes, but most hate the uncertainty that private markets bring to something as fundamental as retirement income). Moreover, means-testing is not the only method of targeting. Helping groups with generally low incomes, such as lone parents (eg through childcare support) can be cost-effective even without an income test.

However, we also need to drop any knee-jerk resistance to means-testing and accept that whatever its drawbacks it will have an important role. An obvious example is the huge amounts of money that have been transferred to working families through income-dependent tax credits. This made a substantial dent in child poverty before the recession hit, and certainly did more to put money in families’ pockets than a universal child benefit ever could have.  We must also be wary of trying to extend a universal entitlement to a service such as long-term care for the elderly unless we are really willing to produce the extra cash to make this work. As Scots have found, free access for all can trigger higher thresholds of entitlement (you need to have very high physical needs to be eligible) if done on the cheap.

I would still love to live in a world in which taxpayers see the benefit of collective provision so much that they will vote to pay higher taxes in order to extend universal services: free childcare and free elder care would be top of my list. But I know that we do not live in that world. So it’s time we drop our scruples, recognise that resources need to be focused on lower income groups and look for the least-bad way of doing so.



From → welfare system

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