Today’s public finance statistics show progress towards reducing the deficit. Net borrowing has fallen by almost a quarter on a year ago, partly driven by better than expected income tax figures. But the Chancellor of the Exchequer will not be able to reach his fiscal targets with a few months of above-average receipts. Indeed, outside of its claim that £5bn can be raised from tax avoidance, the government’s so-called ‘tax lock’ will largely prevent him from using tax levers to close the deficit. Instead, he is going to have to cut deep into public services and the welfare bill in order to come up with the required savings. The upcoming budget and subsequent spending review, where we will get more detail on his plans, are where the real business of deficit reduction will happen.
The centre-piece of the Chancellor’s fiscal strategy is an aim to cut a sizable chunk (£12bn) off the welfare bill by 2017/18. The options floated so far, of a freeze in the value of working-age benefits, a reduction in the benefit cap and the withdrawal of housing benefit from 18-21 year-olds, are likely to save only a little over £1bn. That leaves more than £10bn of welfare reductions unaccounted for. Even if the chancellor were able to reduce this figure by arguing that low inflation has reduced the need for cuts, this may also impact on the OBR’s receipts forecasts, meaning they are still going to need huge savings.
The UK currently spends around £220bn on welfare. Just less than half goes towards pensioners and child benefit, both declared off-limits by the government. This means that the cuts will need to make significant in-roads into the remaining £113bn, of which the largest items by far are tax credits (£30bn), housing benefit (£26bn), disability benefits (£22bn) and incapacity benefits (£15bn). Some combination of cuts to these benefits will be required if the government are to achieve their £12bn target. Focusing exclusively on out of work benefits wont cut it – we currently spend just £5bn a year on jobseeker’s allowance and income support, the two key working-age benefits for those not in a job.
The IFS have taken a look at some of the specific choices the government could make to these benefits to generate savings; the government could require housing benefit claimants to contribute 10 per cent of private sector rents (a saving of £0.9bn), or they could abolish housing benefit for all 18-25 year-olds (saving £1.5bn). If they started to tax the key disability benefit (formerly Disability Living Allowance, now the Personal Independence Payment), they could raise £0.9bn. More sweeping changes could generate larger savings; if they reduced the basic amount of child tax credit families can claim to its 2003/04 levels (in real terms), they could save £5bn.
If these options sound harsh, that’s because they are. Every pound saved will be a pound in lost income for an eligible family, with predictable consequences for living standards and child poverty. While these options may be presented as generating incentives for families to move into work, remember that around 80 per cent of benefits outside pensions go to families in work, meaning that cuts are likely to hit the working poor. But it is changes of the kind listed above that the DWP and Treasury will currently be looking at in their search to identify savings. If, as has been rumoured this week, they are exploring a further £3bn of welfare cuts on top of the £12bn already mooted, the impact will be even more severe.
IPPR has argued consistently that the working-age welfare bill can be sensibly controlled, but not by a crude process of freezing or cutting entitlements. This does nothing to combat the economic and demographic forces acting to increase demands on the welfare system; rising rents increase the need for housing benefit to paper over the cracks in our broken housing market, endemic low pay inflates the tax credit bill, and the need for both parents to work in order to reach a decent standard of living puts upward pressure on the price of childcare to meet caring needs. There are more examples, but the overall picture is of a system that does little to tackle the underlying causes of welfare receipt.
Instead what are needed are very difficult choices about where public funds are best spent. Rather than lining the pockets of landlords through housing benefit, we should be unlocking those same funds to invest in social housing. Similarly, instead of topping up the pay of working parents so they can afford extortionate childcare fees, we should recognise the need for more hours of cheap or free childcare at all ages. Across a range of policy issues, we throw good money after bad instead of investing in more sustainable solutions for the long-term.
Realising these opportunities to switch money from cash welfare into services and investment requires some long-term leadership and vision from policymakers. The upcoming spending round represents a perfect opportunity to be thinking of creative solutions to reduce the welfare bill in a way that is both fair and sustainable. But the overwhelming focus on cutting to meet a self-imposed target of a balanced budget by 2017-18 is likely to take precedence over genuine reform.