Report

Balancing taxes and benefits

This report from UK think tank Civitas suggests that wage stagnation may be an important driver of rising net recipience in the medium term.

According to the latest data from the Office of National Statistics, more than half of households in the United Kingdom (52.6 per cent) receive more from the state in benefits (including benefits in kind such as NHS care) than they pay in taxes. Overall, approximately 35.1 million individuals live in ‘net recipient’ households – an increase of around four million since before Covid.

This report continues the discussion that began in Civitas’ previous report, An analysis of the effect of taxes and benefits on household income’ (2023), which highlighted that net recipience in 2021 was the highest ever recorded. This is in the context of a substantial upward climb since records began in 1977, when 37 per cent of households were net recipient.

‘Balancing taxes and benefits’ updates the analysis with the latest data, and begins to explore possible reasons for the rise in net recipience. Bloated state expenditure is one obvious culprit, especially with the sudden increase in spending seen during Covid. But this cannot explain the long0term rise in net recipience since the 1970s. The same can be said for the increased numbers of people claiming out-of-work sickness benefits since the pandemic began – again, this is likely to be a significant factor in the short term, but it cannot explain the long-term trend.

Many might point the finger at the ageing population: with an ever-growing share of the population retired and claiming the State Pension, and a shrinking group of working age people to foot the bill, net recipience would be bound to grow. But this too cannot fully explain the problem, since net recipience is growing faster among working people, meaning it cannot be purely caused by changing demographics.

This report suggests that wage stagnation may be an important driver of rising net recipience in the medium term. Average wages have not grown in real terms since the 2008 financial crisis. This of course limits the amount of income tax that workers will pay, meaning that as the cost of providing various benefits increases, more and more households will tip into net recipience. Over the long term, the ratcheting increase in net recipience remains a puzzle. But it is crucial that we attempt to understand it.

An economy where more than half of households are not able to support themselves cannot be sustainable. We must identify what has gone wrong so that we can begin to fix it.