Thursday, 19 August 2010

The Real Benefits Scam

One rule for them…….

Last week the Prime Minister gave an interview in which he announced that his government would tackle fraud and error in the welfare system.

Welfare and tax credit fraud and error cost the taxpayer £5.2 billion a year. That’s the cost of more than 200 secondary schools or over 150,000 nurses. It’s absolutely outrageous and we can not stand for it.”

Recent figures published (pdf) by the Department for Work and Pensions (DWP) show that overpayment to the claimant due to error and fraud amounted to £3.1 billion (or 2.1% of expenditure). Of this £3.1 billion the reasons for overpayment were; claimant/official error £2.1bn and Fraud £1.0bn. Fraudulent claims by “benefit cheats” accounted for just 0.7% of the total benefit bill.

Meanwhile, the same document also tells us that underpayment of benefits accounts for £1.3bn (0.9%).

In other words the amount overpaid to claimants is £3.1 billion but underpayment to claimants many of whom are in desperate need is £1.3 billion which means that if the system was run at its maximum efficiency it might save £1.8 billion per annum.

The Prime Minister also referred to Tax Credits. Figures provided (pdf) by Her Majesty’s Revenue and Custom (HMRC) shows that the amounts overpaid to claimants is £2.1 billion (of which some £460 million was due to fraud). Meanwhile there were errors of some £260m where claimants were underpaid. So again, the actual net gains are £1.8 billion

The Prime Minister’s £5.2 billion - £3.1bn overpaid in welfare benefit, and £2.1 billion in tax credits - apparently only refers to overpayments made to claimants, it is the gross figure not the nett.

Left out is any reference to the £1.6 billion where the government underpaid eligible claimants – unless, of course, the government is only planning to crackdown on errors in its favour and ignore errors that leave vulnerable claimants underpaid?

The actual gain from a more efficient operation of the welfare and tax credit system would be £3.6 billion per annum not £5.2 billion. But £3.6 billion is still a lot of money, to use the Prime Minister's own analogy that is 138 secondary schools or 104,000 nurses and given the size of the deficit he can't afford to overlook any opportunities to reduce that deficit which is, of course, the gap between government receipts and government expenditure.

Of course, the mantra is that in order to make something more efficient you have to give it to the private sector - so the government is planning to recruit private credit references agencies to combat benefit fraud.

This concerns the Information Commissioner who has written (pdf) to the Welfare Reform Minister to request a meeting seeking further clarification from the Department of Work and Pensions in relation to the government’s proposal to use information provided by credit reference agencies to combat benefit fraud.

In his letter the Information Commissioner says “I hope the Government is going to hold to the good practice of considering the data protection implications of policies at the earliest stage

The reference to the Information Commissioner allows me to mention the fact that back in early 2008, the Information Commissioner forced HMRC to admit the size of the “tax gap” caused by the practice of tax avoidance and evasion by wealthy individuals and large corporations.

This followed publication of figures (pdf) that estimated that tax avoidance was costing the country some £25 billion per annum (£12 billion from large corporations, and £13 billion by individuals).

Eventually, HMRC released an estimate (pdf) that the tax gap due to avoidance, general non-compliance, and non-payment was probably £22 billion per annum but could be as high as £40 billion per annum.

Since then a further revision (pdf) published in March by HMRC estimates that the tax gap across all HMRC administered taxes is £40 billion including £15 billion from indirect taxes, £9 billion from corporation tax and £16 billion from other direct taxes.

This adds up to 8% of the total tax liability (compared to the 2.1% of benefit payments lost to error and fraud). The other two countries that have published figures for tax gaps (Sweden and the USA) calculated tax gaps of 10% and 14% respectively, the latter percentage if applied to the UK would take the tax gap figure up to £70 billion.

Fraud is, of course wrong. But, as has been explained above the loss to the public purse caused by fraud in the benefit system is £1 billion, a third of the gross loss caused by error and fraud. Meanwhile, some £40 billion is being lost to the public purse each and every year by deliberate avoidance, non-compliance and non-payment of taxes.

Or as the Prime Minister might have put it, that's equivalent to over 1500 secondary schools or over a million nurses.
So why is the Prime Minister not implementing a tax crackdown on the rich and powerful to complement the benefit crackdown on the poor and vulnerable. Is it because it is easier to pick on the poor and vulnerable but takes more courage to take on the rich and powerful?

The reality is that we are facing tremendous cuts to public services not simply because we spend too much on public services but also because the government is inefficient at tax collection.

Reducing non-compliance and non-payment of taxes and closing loopholes that promote tax avoidance is likely to be more productive than working through the 140,000 cases where a claimant mistakenly received an average of £35 more than they should have.

Perhaps one example of the disparities between clamping down on benefit errors and fraud whilst ignoring tax errors and avoidance will suffice. The DWP published its Structural Reform Plan only last month and set the following target for itself for the end of the year:

6.4 Further reduce fraud and error in the benefits system to a maximum of 1.8% of expenditure

As pointed out earlier, the current level of welfare benefit error is 2.1% in overpayments, so a reduction to 1.8% would see £440 million recovered - except that by March 2011 it is estimated by the treasury in George Osborne's emergency budget that the level of welfare benefit payments will have increased by 2011 so that in fact a reduction to 1.8% lost due to error and fraud will see £3.05 billion lost compared to the current £3.1 billion - so a saving of £50 million then . Not quite the £5 billion headline figure quoted by the Prime Minister.

In contrast, back in 2005, a retailing business bought by “probably the greatest retailer of his generation” paid out probably the largest dividend in British business history – not to him but to his wife. The wife was a resident of Monaco so by assigning the assets to her it avoided any payment of tax to the British Exchequer.

As a result it was estimated that this single payment avoided some £300m in taxes. In other words this one transaction was worth six times the savings in public spending that the DWP expects to get from the Prime Minister’s crackdown on benefits.

The name of this “greatest retailer of his generation”? Sir Philip Green, recently appointed to advise the government on how to reduce public spending including the payments of benefits to people for whom £300 million is the stuff that lottery dreams are made of.