The Conservatives are promising to cut welfare spending by £12 billion over the next two years. But they still don’t want to tell you how they’re going to do it.
In the first televised head-to-head between David Cameron and Labour leader Ed Miliband last week, the prime minister told co-host Jeremy Paxman that “the £12 billion compares to the £20 billion that was saved in this current parliament by this government on welfare”. Well, in the interests of transparency let’s take a look at what happened to welfare spending over the past five years.
While not denying the possibility that they will be achieved, you only need to look at the Coalition’s record in office to spot the huge problems that these cuts pose.
Firstly, here’s a helpful breakdown of what we mean when we talk about “welfare spending” from the Office for Budget Responsibility (OBR), the government’s budget watchdog:
The government claim that over the course of this parliament it has reduced welfare spending by some £20 billion relative to what would have happened if they had not taken any action. There is no doubt that this amounts to a significant change in the trajectory of spending but it should also be acknowledged that despite the heavy cuts the total outlay was only £2.5 billion lower in 2014 — 15 than it was in 2010 — 11.
In other words, the cuts have been made but the expected savings for the public purse failed to materialise.
And here’s why:
As is clear from the chart, over half of welfare (read social security) spending we are talking about here is accounted for by a combination of pensions, tax credits and housing benefit. Together those three account for £130 billion of the £210 billion of total social security spending in the 2013-2014 fiscal year.
Unfortunately, the OBR’s forecasts consistently underestimated the amount of money that was spent on these areas. And by some distance.
Assuming that most of the easier cuts have already been made, the options for further reductions in the welfare bill may be limited. Below are a selection of the problems a Conservative-led government is likely to face in finding that magic £12 billion of savings.
The triple-lock handcuffs
It is hard to imagine an example of a Coalition policy that more clearly violates its “we’re all in this together” rhetoric than the so-called triple-lock guarantee.
Under it the government committed to increase the state pension every year by the higher of inflation, average earnings or a minimum of 2.5%. In other words, the government was guaranteeing to spend more on pensioners every year in real terms even as they were preaching the need to bring down state spending.
This was even more generous than the deal offered by the previous Labour government, which had planned for the Basic State Pension to increase in line with earnings growth. In the words of the independent Institute for Fiscal Studies (IFS):
“In terms of uprating, then, benefits for pensioners have been protected from cuts, or even been made more generous, whereas those for working-age people have been made less generous.”
The bottom line here is that the government is now spending more on state pensions than before the onset of its austerity measures, with each recipient getting nearly £500 a year more on average over this parliament. An odd choice, you might think, considering how much of the total welfare budget was already being spent on pensioners.
So why did they do it? Older people vote.
And this is what it looks like in practice — pensioners have escaped the last few years relatively unscathed which other benefit recipients have had to take a much bigger hit to their incomes:
Given that the political calculation for sparing pensioners from cuts will not change over the next five years, we can expect the triple-lock to remain in place and with it the imperative to find even deeper cuts elsewhere to hit the Conservative’s ambitious budget targets. Indeed the prime minister has already pledged to protect pension payments.
The housing benefit headache continues…
If the government’s decision to help pensioners reflected a political calculation that the electoral rewards would outweigh the fiscal costs, the same can surely not be said of the housing benefit bill.
Over the course of the past five years the cost of housing benefit has risen by £700 million, some £3 billion more than the Coalition initially thought it would need to spend on the programme. The reason for this is fairly simple: The recovery in wages for British workers has been hugely disappointing for all involved, with salaries down in real terms, while rents have been moving in the opposite direction.
As a consequence, the government has been forced to house many more people than it was expecting in private rental housing. Here’s how the OBR’s forecasts of the costs of housing benefit have developed over time:
Wages in the UK are finally picking up, but the pace remains disappointing and real income gains are largely being driven by rock-bottom inflation rather than successful wage negotiations. However, these wage gains will have to accelerate faster than rents over the next few years if the housing benefit bill is going to start falling.
That is a big leap of faith.
Making cuts is never ESA-y
Another of the challenges that forecasters have faced is the mess of the employment and support allowance (ESA).
Initially designed by the then Labour government as a replacement for incapacity benefits, the ESA programme was supposed to offer significant savings. In reality the costs of incapacity benefits in 2015-2016 were revised up by £3.5 billion.
Why? Well it turned out that the number of people who were wrongly claiming incapacity benefits was much lower than the government had thought and a backload of caseloads that has slowed the transition of claimants from incapacity benefits to ESA.
The result was that those expected savings proved to be, well, a mirage:
Yet the Conservatives think that they will be able to secure a 17% reduction in spending on disability living allowance (DLA) by transferring claimants to the new personal independence payments (PIP) system. The IFS seems rather (to put it politely) sceptical of this claim (emphasis added):
Much of the hoped-for savings from the introduction of ESA have failed to materialise, and it is an open question whether the personal independence payment will be any different. Mr Osborne wants further cuts to social security spending to help reduce the deficit. He may end up having to make cuts just to stay on track.
So what makes the government so sure that it can succeed this time?
The BBC revealed a leaked document that lays out some possible cuts to reach that £12 billion target.
The plans reportedly include restricting carer’s allowance to those eligible for Universal Credit; adding a contributory element to Employment and Support Allowance and Job Seekers Allowance; making disability benefits taxable; shifting the burden of industrial industry compensation to businesses; limiting child benefit to the first two children; and setting benefit caps that differ by region.
Even taken together, it is difficult to see how these measures would add up to the £12 million necessary over the next two year.
Still the cuts identified above would at least provide some kind of framework for analysts to assess the feasibility of the Tory plans and provide some indication to the public of their impact on millions of households. Finally, you might have been forgiven for thinking, we have some detail.
Not so fast! Over the weekend Duncan Smith denied that the leaked document was a blueprint for a Conservative strategy. Instead he said he doesn’t have any fixed plans. If you want to know whether the cuts are “feasible” or not, you’re just going to have to take him at his word.
And that’s ridiculous. We have seen how difficult it is to cut welfare spending without the costs popping up elsewhere in the system. Failure to inform the public about fundamental changes to the welfare system leaves a democratic deficit far wider than the budget one George Osborne is so keen to address.
With the General Election 38 days away, the time to close that deficit is now!
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