ChainWhat it assumes · how to break it
Start
The government raises welfare benefits, for example increasing child benefit and Universal Credit for all claimants, without raising taxes.
1
As a result, welfare spending rises, and because welfare is the largest single area of public spending, even a small percentage increase costs a large sum.
transfer payments · current expenditure
transfer payments · current expenditure
Assumes: The rise applies to a large number of claimants.
But: A targeted rise for one group, such as families with young children, costs far less than a rise across all benefits.
2
Consequently, government spending rises relative to tax revenue, so the budget deficit widens.
budget deficit
budget deficit
Assumes: None of the cost comes back in tax.
But: Recipients spend most of the extra money and pay VAT and other indirect taxes on it, so part of the cost returns to the Treasury.
3
This means the structural deficit rises, because benefit rates once raised are paid every year and are politically hard to cut later.
structural deficit · cyclical deficit
structural deficit · cyclical deficit
Best link to attack
Assumes: The rise is permanent.
Assumes: The rise is permanent.
But: If the rise is a temporary payment during a recession, it adds only to the cyclical deficit and falls away as the economy recovers.
4
Therefore, government borrowing and debt interest rise, putting pressure on future governments to raise taxes or cut other spending.
national debt · debt interest
national debt · debt interest
Assumes: The extra borrowing is costly to service.
But: When interest rates are low, extra borrowing is cheap, and the debt-to-GDP ratio can be stable if the economy grows.
End
The budget deficit widens, particularly the structural deficit, adding to debt and debt interest.
Evaluation chain
- E1However, the effect on the fiscal balance depends on whether the benefit rise is permanent or temporary.
- E2If the rise is a one-off payment during a downturn, then it adds only to the cyclical deficit.
- E3As a result, the deficit narrows again as the economy recovers, tax receipts rise and fewer people claim benefits.
- E4So a temporary rise has little effect on the long-run fiscal position, while a permanent rise widens the structural deficit and must eventually be funded.
Another way to attack it: Lower child poverty may reduce later spending on health and remedial education and raise future earnings and tax receipts, so part of the cost may be recovered over the long run.
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Questions this answers
- Assess the impact of higher welfare spending on the government's budget balance.
- Discuss whether governments should cut welfare spending to reduce the budget deficit.
- Explain the difference between the structural and cyclical deficit, with reference to benefits.
Diagram
No standard diagram. Figures for welfare spending as a share of total public spending or GDP make strong evidence.
Reverse and related
Benefit freeze, as from 2016 to 2020 → welfare spending falls in real terms → the deficit narrows, though relative poverty may rise.