Tories fiddle while cost of living crisis intensifies

In the wake of the Government’s own fraud minister resigning, Prem Sikka identifies a multibillion-pound scandal

The UK is facing the twin threat of a rising cost of living and shrinking disposable incomes. The Government is adding to the crisis by hiking taxes and sending millions into poverty and blighting people’s life chances. Little attention is paid to fraud and errors which remove resources from public services and place heavy burdens on low- and middle-income families.

Here is a starter. The minister of state at the Cabinet Office has told the House of Lords “that our best estimate of total fraud and error losses to Government are between £29bn and £52bn per year. This comprises the published estimates for fraud and error loss in tax and welfare”.

Over the last 12 years the total loss could be between £348bn and £624bn, large enough to make a qualitative difference to people’s lives.

To put this into perspective, the annual loss is up to £1bn a week. It is bigger than the annual defence budget. The £52bn loss is over four times the £12bn that the Government will raise from the 1.25 percentage point increase in National Insurance contributions from April 2022. The new National Insurance rate of 13.25% begins to bite at incomes above just £9,880 a year; i.e., the poorest will pay for the Government’s incompetence.

The Government has also frozen the income tax-free personal allowance at £12,570 until 2025/26. This alone will drag an additional 1.5 million people into paying tax at the basic rate of 20% as income may rise with inflation but personal allowance won’t. The higher income tax threshold for the 40% marginal rate at £50,070 is frozen until 2025/26. It won’t rise with inflation and would force around 1.2 million people to start paying the tax at the marginal rate of 40%. The above tax hikes by stealth are expected to raise £2.77bn in 2022/23, rising to £13.04bn in 2025/26 – all considerably less than the losses due to fraud and error.

The poorest bear a heavy burden for government failures. Last October, the chancellor reduced Universal Credit by £4bn and removed £1,040 a year from 4.4 million families, often the poorest. The Government has also suspended the triple-lock on the state pension and deprived pensioners of some £4.7bn, equivalent to about £8-£10 per week. The median weekly state pension for women is between £150.25 and £174.47, while for men it is around £172.83 to £178.52.

The £29bn to £52bn loss is for the year 2019/20, i.e. before Covid. The Government Counter Fraud Function has risk-assessed the Government’s Covid-related financial schemes and classified “16 of these schemes as having a high or very high fraud risk, accounting for 57% (£219 billion) of the £387 billion”. Future losses would be considerably higher. This does not include £37bn squandered on the ineffective Test and Trace programme and sundry other programmes.

Some £33bn of Covid-related expenditure appears to have been written off in recent days. This includes £17bn of unpaid bounce-back loans, £4.3bn due to frauds in furlough and self-employed support, and £10bn on faulty, unusable and overpriced personal protective equipment.

No government can fully eliminate frauds and errors, but they can make a serious dent in them. A major reason for the persistence of fraud and errors is that the UK lacks effective institutional structures. HMRC is a key institution in combating fraud but has been systematically starved of resources. Fraud detection and prosecution is labour-intensive, but the HMRC workforce today is smaller than it was in 2005. Numerous court judgments have declared tax avoidance schemes sold by big accounting firms to be unlawful, but no big accounting firm has been investigated, prosecuted or fined – though they all got Covid-related contracts. Benefit fraud is about one-tenth of tax fraud but is 23 times more likely to be prosecuted.

Fraudsters were able to easily claim Covid-related financial support because they were not required to provide employee National Insurance numbers or HMRC tax reference numbers. Shell companies are used to defraud the public purse. Anyone from anywhere in the world can form a company in the UK. Companies House does not authenticate the information filed with it. Fake addresses and director names are used. I have drawn the Government’s attention to some improbable director names accepted by Companies House. These include “Adolf Tooth Fairy Hitler”, “Lord Truman Hell Christ”, “Judas Superadio Iskariot” and “Victor Les-Appy Hugo”.

The UK Government is losing billions of pounds due to fraud and error and the amount is set to rise as mismanagement of Covid becomes evident. Much of it is due to ineffective institutions, obsessions with smaller state, cuts to public expenditure and the ideology of deregulation. This obsession is being financed by tax hikes on low/middle-income families, cuts to pensions and support for the poorest. This has deepened the cost of living crisis and condemned millions to poverty.

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