Department for Work and Pensions figures released this week suggest that only 7% of applicants for the new disability benefit, Employment Support Allowance (ESA), during the two years since its inception, are found unfit for work. The implicit suggestion is that the previous regime was widely abused by ‘scroungers and malingerers’. Yet the total number of claims for disability related workless benefits is almost exactly the same, at 2.6 million, in the latest data (November 2010) as it was in 2008, when the new benefit started. Even among claims less than two years old and hence all assessed under the new regime there are 640,000 claimants, which is exactly the same as in 2008. So, how can the impression of a big crackdown on claims under the new test, and the absence of any decline in numbers claiming be reconciled?
The answer is three fold. Firstly, although only 7% of new applicants go on to be deemed unfit for work, another 17% are eligible for ESA, but deemed that with the correct support and improvements in health they may get back into work. ‘May’ being the important word here. I designed the structure of support for this group under the ‘Work Related Activity Group’ banner, which will be delivered under the new Work Programme. How successful it will be is yet to be demonstrated. So, 24% of new claims go on to be eligible for ESA, not 7%.
The second key point is that a large number of applicants never got onto Incapacity Benefits (IB), the forerunner of ESA, either. Some people simply got better before the assessment phase was completed and so never got tested, or were denied access through the test applied at the time. People start a claim for disability related benefits but begin in an assessment phase, during which they receive the same benefits as they would for unemployment. It is only after this is completed, at around 13 weeks, that the recipient receives the eligibility decision as to whether they move on to the full ESA benefit. A lot of people withdraw before the test occurs and always have; 36% of applicants in the new figures. A useful guide to this would be what proportion of claims under 13 weeks go onto the main benefit. However, as so many claims go to appeal, during which time people remain as though they are still in the assessment phase, a better picture emerges after 6 months. The figure below highlights the survival rates for claims before and after the new ESA regime was introduced in late 2008. It shows the proportion of claims under 13 weeks old, and hence in the assessment phase, which are still live a further 3 months, 6 months and so on after their commencement. After 3 months some 72% of applicant’s claims are still live and after 6 months this falls to 50%. Of key importance here is that this was around 80% and 60% respectively under IB pre-October 2008. Hence, ESA has reduced the numbers of applicants reaching at least 6 months duration by 10%, and this appears to persist through to the longest duration data we have. So the new regime is leading to around 10% fewer people, after the appeals process is completed, being passed as eligible for ESA. A story far removed from just 7% being found unfit for work.
The third reason this has not had any effect on the total number of claims under 2 years duration, and thus assessed under the new test, is that the total number of new claims has risen from around 130,000 per quarter in 2008 to around 160,000 now. This is almost certainly as a result of the recession but past experience suggests it will take quite a long time to abate fully. So, between 1 and 2 years duration we now have the first quarter of data that is fully under the new regime. After all the assessment and appeals have been completed we can derive that the number of claims has fallen to 206,000 from about 235,000 prior to the reform. This is around 12% lower, but this is currently offset by shorter duration claims. As time progresses and the impact of the recession diminishes the new ESA tests will make a clearer difference to the total number of claims. However, it will be a long time before this is very visible. What will be more important over the next 3 years will be the re-testing of existing IB claimants, as well as the removal of eligibility to ESA for those claiming for more than 1 year and who are not eligible for means tested benefits.
Figure 1 Proportion of Claims of 0-13 weeks duration that are still live after intervals specified
Third Sector Online is reporting the results of a survey by website easyfundraising.co.uk, finding that of 400 people surveyed, some 53% would not give more money to charity if the government were to cut income tax.
Although such a cut is not currently on the cards (although proposals to significantly increase personal allowances over the course of this parliament, if implemented, would reduce the marginal rate of taxation for some and the average rate for most), this finding is interesting (I will ignore for now questions of selection bias raised in TSO’s comment section).
Gary Thompson, the managing director of easyfundraising.co.uk, identifies income tax as an “annoyance”, but is reportedly surprised at the finding that only 47% of the population would choose to spend their windfall on charitable donations, suggesting that: “As a result of the increasing cost of living in Britain, many are facing a difficult time financially, and the coalition government’s public sector cuts and changes to family benefits are clearly having a growing impact on our finances and ability to support charitable causes.”
A lack of financial stability and rising prices are pertinent factors, but even were they not, this result should not be as surprising as it made out.
If income tax were cut, there would be two primary effects. First would be a rise in income; if, let us say, the basic rate of tax were decreased from 20% to 18%, workers would have more money in their pay packet each month. The expected effect of this rise in income would be that individuals may consume more of a variety of goods, including, potentially, charitable donations; it is the absence of this effect which is causing surprise here.
However, there is a second effect to consider here. All giving by taxpayers in the UK is eligible for Gift-Aid, whereby charities can reclaim income tax at the basic rate. Hence, the price of giving changes with the income tax rate. At the moment, if a worker wishes the charity to receive £1, she must sacrifice 80 pence of other goods; if income tax fell to 18pence, her donation would have to rise to 82p for the charity to receive the same amount. She will be paying more for the same amount of “good” done. If, as seems likely, tax incentives like Gift Aid make giving more attractive, this rise in the price of giving will make it less, and will lead to a fall in donations.
The results of the survey suggest that for 53% of the population, the price elasticity of demand for donations is larger than the income elasticity of demand; not a damning critique of society or the times we live in.
 If this money is financed from borrowing (as seems likely in the current state of nature), and Ricardian equivalence, a controversial but not disproven theory, holds, then any rise in income will be perfectly offset by a rise in savings as workers seek to cover themselves against future tax rises to repay the debt.
As part of David Cameron’s commitment to building a “Big Society”, as well as to engaging in some of the most sweeping cuts to public spending in living memory, there has naturally been discussion about the outsourcing of public services to private-sector organisations.
At one end of this debate is a discussion about whether any non-governmental organisation should be involved in the delivery of vital public services. At the other, perhaps more reasonable end of the debate, is a discussion about what kind of organisations should step in to fill the gap left by the state’s withdrawal from service provision – in particular, whether these organisations should be allowed to make a profit.
In education, Michael Gove, the secretary of state, is quoted in this week’s economist as saying “We don’t need the profit motive”, in what may well be regarded by some as a statement of political convenience more than firmly-held belief. Nick Seddon, from Reform, a think-tank, has said “It’s a fallacy to think you can choke off the profit motive without losing momentum and innovation”.
The evidence is somewhat less certain that Mr Seddon makes out. Two large areas of spending where the government stands accused either of outsourcing to private firms or conspiring to are Education and Health, where great weight is put on the tendency of the best practitioners to “go the extra mile”, be that in the form of higher quality pastoral care or extra tuition in schools, or unpaid overtime and a superior bedside manner in hospitals. In both cases, the provision of the extra-mile of care is time consuming and often uncompensated. Evidence from researchers at the CMPO (Gregg et al (2008)) , suggests that in non-profit “caring” environments, workers provide on average 75 minutes extra unpaid overtime a week than do their colleagues in for-profit caring firms.
Sloan (2000), in his comprehensive review of ownership forms for hospitals in the United States, found that for-profit and not-for-profit hospitals were more alike than different across a number of dimensions. Importantly for the claim that ‘innovation’ would disappear along with the profit motive, he finds (although evidence is relatively sparse), that the rate at which hospitals adopt new technologies is influenced by the extent to which they are competing with other hospitals for patients, but not by their ownership type (for profit vs. not for profit).
If it is not obvious that not-for-profit hospitals or schools would perform worse (or indeed, differently), than profit-making counterparts, this may be driven by the similarities between the people running them. Glaeser and Schleifer (2001) model the utility functions for individuals forming not-for-profit firms as the same as individuals starting for-profit companies. As not-for-profits are more trusted (as the response to the government’s plans would seem to suggest), a utility maximising agent may find it preferable to run a not-for-profit “free-school” or academy, and to extract their utility in the form of perks; more control over the curriculum and timetable than in a standard school, and more “Warm Glow” from having contributed something to society. In a hospital context, this resembles the possibility of “cartels” of doctors running (not-for-profit) hospitals efficiently so as to maximise their own utility, as suggested by Sloan.
In summary, the potential hazards of not-for-profit ownership of public services, when compared with for-profit ownership, may be overstated. This appears to be a confusion of the ‘profit motive’ for an ‘efficiency motive’ – there is evidence suggesting that the latter may be achieved without the former, and that not-for-profits have a lower incentive to sacrifice non-contractible quality for more profit. Perhaps, on this occasion, Mr Gove is correct.
 Gregg, Grout, Ratcliffe, Smith and Windmeijer (2008) “How important is pro-social motivation in the delivery of public services” CMPO working paper
 Sloan (2000) “Not-for-profit ownership and hospital performance” Handbook of health economics, vol 1 pp1141-1174
 Glaeser & Schleifer (2001) “Not-for-profit entrepreneurs” Journal of Public Economics Vol 81 Issue 1 pp99-115