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Are you a contributor to, or a burden on, the nation's finances? - 'Squeezed middle' increasingly dependent on the state
 

ED MONK: Are you a contributor to (or a burden on) the nation's finances?

Published: 13:38 GMT, 9 October 2012 | Updated: 09:11 GMT, 11 October 2012
Class apart: ONS figures show how even those higher up the income chain are dependent on the sate.
Class apart: ONS figures show how even those higher up the income chain are dependent on the sate.
Are you, would you say, an above or below average driver? Is your sense of humour better, or worse, than the average person's?
Just a couple of questions where the number answering that they perform better than the majority far exceeds the number that is possibly able to. Someone, knowingly or not, has an inflated opinion of themselves. We can't all be above average.
Here's another such question. Are you a net contributor, or a net burden, to the state?
New analysis from a political think-tank - the Centre for Policy Studies (CPS) - has crunched Office for National Statistics (ONS) numbers on the contribution made to government coffers by households from different stages of the income scale. 
It makes uncomfortable reading for many in the 'squeezed middle' who assume that it is they who have been forced to bear the burden of balancing the nation's finances.
The CPS took the amount a household pays in tax, direct and indirect, and then subtracted the amount it benefits from state benefits and tax credits, as well as 'benefits in kind' such as state education and the NHS.
The headline figures are dramatic and will fuel fears that Britain risks becoming a 'client state' - where a majority of the population receive more from the state than they put in, subsidised by a shrinking number of net contributors at the top end of the income scale.
 
According to the CPS, we're there already. Having split the country's households into five
income 'quintiles', the CPS claims that the bottom three, on average, now receive more back in state aid and value through public services than they pay in tax. The CPS claims that 53.4 per cent of total households received more in benefits than they paid in taxes in 2010/11 – compared to 43.1 per cent in 1979 and 43.8 per cent in 2000/01
It means households in the bottom 20 per cent of earners get £10,153 more in benefits than they pay in tax. Even the middle 20 per cent get £4,589 more than they pay in.
Do you win, or lose, from Britian's tax and spend policies?
Do you win, or lose, from Britian's tax and spend policies?
You have to get to the top 40 per cent before you can claim to be a net contributor. Households in the fourth quintile pay £4,113 more in tax than they take out, while the top 20 per cent of earners pay a whopping £20,125 more in than they get back.
The UK tax and spend is designed to be 'progressive', with those at the bottom get more from the state than those at the top, but the CPS say that the trend has accelerated in the last decade.
In 2000/01 the middle quintile of earners paid in 5.9 per cent more in taxes than they received back in value from the state. Ten years on and the middle quintile gets back 20 per cent more than they put in.
This is sure to leave many middle-earners scratching their heads, wondering how on earth the hundreds of pounds taken from them each month in income tax, National Insurance, VAT, fuel tax etc can be matched, let alone exceeded, by state benefits and value from public services.
Here things become a little more complicated.
Firstly, these are averages. Whether you pay more than you get back will depend a great deal on whether you have children of school age, whether you claim child benefit, or whether you need to call on the NHS. Have you taken maternity or paternity leave, or taken part in a government training scheme? It all increases the value you are deemed to have extracted from the state.
There is a higher proportion of pensioners living higher up the income scale than in 1977.
There is a higher proportion of pensioners living higher up the income scale than in 1977.
But the biggest single factor pushing a greater proportion of homes into state dependency is our aging population and the increasing numbers in need of a state pension.
As they hit retirement, individuals who may have been net contributors all their adult lives suddenly move from paying income tax to taking the state pension and, with age, becoming more likely to call upon services such as the NHS.
The effect is exaggerated because, contrary to the message of some pensioner groups, we keep our old folk in a better standard of living today, relative to the rest of us, than they have enjoyed historically.
In 1977, most pensioners fell into the bottom quintile by income, with most of the rest in the second bottom. But by 2008/09, less than half were in the bottom quintile with a higher number in the second bottom. There was a large minority in the middle quintile by income and significant numbers in the top two (see bar chart). 
This helps to explain why state dependency now stretches higher up the income chain - we have more pensioners and fewer of them live on low incomes.
Even accounting for the impact of the boomers, there is still a recent trend for an increasing number of state dependent households. The CPS points out that non-retired, middle-earning households are still net contributors, but only just. Their net contribution has fallen so that they now pay just 2.7 per cent more in tax than they get back, versus 22.3 per cent ten years ago.
This is at odds with the stereotype of the 'squeezed middle', according to which working households in the middle of the income range have been asked to pay to compensate for the workless poor on one side, and the tax-dodging rich on the the other.
In fact, the CPS analysis of the past three decades suggests that the richest workers have made a remarkably consistent net contribution, paying in around 30 per cent more than they get back, year in year out. Meanwhile, the poorest 20 per cent by income get no better deal from the state now than they have historically, and less than for the majority of the 1990s (see table below).
Unwittingly, many in the squeezed middle could, in fact, be squeezing the state.
There has been outrage at the move to deny households with higher-rate tax payers child benefit, while the Prime Minister has so-far resisted calls to renege on an election pledge to protect universal benefits, including the winter fuel payment, free bus pass and free TV licence, for all pensioners.
If the trend for higher rates of state dependency continues, the case for keeping such measures will be harder to make.
Even among working 'non-retired' households, the level of state dependency is rising.
Even among working 'non-retired' households, the level of state dependency is rising.

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Comments (36)

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thomasruss4, Harrogate, 2 years ago
This is simply twaddle. Is it political twisting of statistics to prove something that is untrue. Or journalists interpreting statistics and getting the wrong conclusions. Or just incompetent statisticians ? All the numbers tell you is that the poorest in our society consume the most financial resources at the point in time that they are poor. and the converse - at the time when you are earning most, and paying taxes, you consume least. The poorest earners in society are either a) old people - who are very poor because the UK pays the lowest pensions in the OECD, along with Ireland - 45% of average earnings (60% is UN poverty line). They receive State Pensions which comprise over 70% of the welfare benefits bill. They incur huge NHS costs - the last two weeks of your life, incur over 90% of your total lifetimes NHS cost. b) young people - whose income is low - they cost the state a lot in Education and Unemployment welfare, because the state fails to educate or create jobs.
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Norfolk Dumpling, Great Yarmouth, 3 years ago
We're retired, but receive no income from the state. Although our income is very low, because it comes from money we saved while working, we qualify for nothing bar health care, which comes to far less than we pay in tax. You might wonder why we pay tax, myself on less than the single persons allowance, the reason is Gordon Brown's move to stop the reclaiming of the 10% tax paid on share dividends. Not all share holders are rich. Also, shares in an ISA are taxed at 10%.
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jim., carlisle england, United Kingdom, 3 years ago
Weigh all things up and i am sure you will agree the two major burdens upon society are MPs/Banksters these guys have without help from anybody else dragged this country into the gutter and in my view we will still be in the gutter decades from now.
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Dave, Stockport, 3 years ago
You can have a tiny income but with a few thousand in the bank, you get no benefits. How does that fit into the analysis showing a negative tax rate? A pensioner couple each on a £5000 a year state pension with joint savings of £20000 after a lifetime of work will have a joint income of £10000 so how do they get the negative tax rate of -20% to -200%?
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GRB, Rayleigh, United Kingdom, 3 years ago
Sally, London Yes the previous Government should have had tighter regulations of the banks, but the slightest mention of tougher regulation was always derided by the Tories too. So you shouldn't expect that any other Government would have done differently. Suggest you look at some of the board of these banks during the Tories time in opposition. There are plenty of MP's and Lords from their side that would suggest they maybe should and did have a much better idea of the pending crisis. Maybe like the bankers, the shareholders and everybody else that had a financial gain from them, they decided it was best not to rock the boat. Cameron states this week in a speech about Labours, borrow, borrow, borrow philosophy, yet he stated in 2008 that he would match Labours spending!! Inspiration nation indeed, if only his speech had any substance of inspiration on where growth is likely to come from!!
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John, Solihull, United Kingdom, 3 years ago
- Julia , London, Not always the case. There are lots of people who are paying 40% or even 50% tax on their occupational /private pensions! This includes people who don't even live in the UK and get no benefit whatsoever from their tax payments!
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Julia, London, 3 years ago
Most pensioners are in fact paying tax,unless they only have state pension ,which is minimal. Occupational and private pensions are taxed at 20%. There are a lot of benefits,but this is just a way of keeping the cost of state pensions very low.
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Dr Spock, london, 3 years ago
The Funny-thing about Conservatives is the people that Vote or think they are Conservatives (The Portentous) have to pay the most in Taxes Etc when the Real-Conservatives (The Wealthy) are in Power. The poor or on Low-incomes dont have the Money & are even poorer. But Labour/Lib-Dems are just as Bad or hopeless now.
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Medway Biker, Chatham, 3 years ago
This goes to show that public sector services are costing too much and should be run more efficiently, and those in the private sector should be paid more in line with the public sector by forcing companies with massive profit to share those more fairly/evenly with the workers that made that profit !
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Francis Coudrell, London, United Kingdom, 3 years ago
Who is Ed Monk and has he not thought about a proper job instead of appearing to be a number cruncher? You make this stuff mean anything you want to with minimal effort. Most of the commercial world is full of people like him.
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