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8 July 2015updated 26 Jul 2021 6:25am

Budget 2015: what welfare changes did George Osborne announce, and what do they mean?

The Chancellor launched his raid on the welfare budget with a number of ideological, damaging measures that would harm the young and vulnerable.

By Anoosh Chakelian

When the Chancellor stood up to make his speech about the Budget, most people watching were waiting for the welfare section. The government’s toughest and most terrifying plan is to cut the welfare budget by £12bn, and ministers have left us (and, probably for a time, themselves) guessing about how specifically they will make these cuts.

George Osborne gave us a pretty good idea in his Summer Budget announcement, and the new measures he has announced are overtly ideological. He referred to claiming benefits as a lifestyle choice (“the benefits system should not support lifestyles and rents that are not available to the taxpayers who pay for that system”) and framed his benefits changes with the mantra: “The best route out of poverty is work.”

His announcements will save £12bn by 2019-20 – a slower pace of welfare cuts than pledged in the Tory manifesto.

Here are his main welfare announcements:

A “youth obligation” for those aged 18-21 that says they must either earn or learn, rather than going straight onto benefits after finishing school.

These young people will participate in an “intensive regime of support from day one” of their benefit claim”, and after six months will be expected to apply for an apprenticeship or traineeship, gain work-based skills, or go on a mandatory work placement, otherwise they will lose their benefits.

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Scrapping the automatic entitlement to housing benefit for 18-21 year olds (with exceptions for the vulnerable and “other hard cases”).

It hasn’t been outlines what these vulnerable and hard cases are, but the clear danger of this policy is forcing young people to live with abusive parents/households they would prefer to escape for reasons of safety and wellbeing. Crisis, the homeless charity, predicts that this suspension of housing benefit will result in an increase in homelessness. Its chief executive Jon Sparkes comments: “Under-25s already make up a third of homeless people and there is a real danger these changes could make things even worse. For many young people, living with their parents simply isn’t an option.”

New Employment and Support Allowance claimants in the work-related activity group will have their claims aligned with the Job Seekers’ Allowance rate.

The ESA is the benefit that replaced the Incapacity Benefit, and provides for people who are ill or disabled and unable to work. There are two categories: support, and work-related activity. The latter group is when you have regular assessments and are considered capable of work at some point in the future, or beginning to move into work immediately. Reducing ESA (WRAG) to the Job Seekers’ rate is a 30 per cent cut, and will hit claimants who are unable to work.

A freeze in working age benefits for four years (including tax credits and Local Housing Allowance, and excluding maternity pay and disability benefits – PIP, DLA and ESA Support Group).

A continuation of the two-year freeze announced at Tory conference last September.

Rents paid in the social housing sector will to be reduced by 1 per cent a year for the next four years.

It has been pointed out that this will reduce Housing Associations’ incentives to build and is yet another squeeze on local government finances.

The income threshold in tax credits will be reduced from £6,420 to £3,850.

Finds out what this means here.

The rate at which a household’s tax credits are reduced as they earn more will be raised, by increasing the taper rate to 48 per cent, and the income rise disregard will be reduced from £5,000 to £2,500.

The Social Mobility and Child Poverty Commission says any cuts to tax credits will cut the incomes of 45 per cent of working families. Punishing those in work doesn’t quite square with Osborne’s insistence that it should pay to work, and it will hit the low-paid hard.

Lowering the benefits cap from £26,000 to £23,000 in London, and £20,000 in the rest of the country.

This has long been on the cards, to bring household benefits income in line with the average household income. Many in Labour support this cut, including acting leader Harriet Harman.

Charging market rate rents to those on higher incomes living in social housing (families earning over £40,000 in London, or £30,000 elsewhere).

Restricting tax credits and Universal Credit to two children for families who have a third or subsequent child after April 2017.

This is another measure that will hurt the poorest families. The children’s charity, Children’s Society, says: “The announcement to limit child tax credits to two children is effectively a two child policy for the poorest families.”

Here’s the full welfare section of George Osborne’s 2015 Budget speech:

For Britain is home to 1% of the world’s population; generates 4% of the world’s income; and yet pays out 7% of the world’s welfare spending.

It is not fair to the taxpayers paying for it.

It needs to change.

Welfare spending is not sustainable and it crowds out spending on things like education and infrastructure that are vital to securing the real welfare of the people.

We’ve already legislated for savings of over £21 billion in the last parliament; capped benefits for out of work families; and started to introduce Universal Credit.

Universal Credit will transform the lives of those trapped in welfare dependency and deliver real social justice – it’s the result of the herculean efforts of my RHF the Work and Pensions Secretary.

But to live within our means as a country and better protect spending on public services, we need to find at least a further £12 billion of welfare savings.

Let me set out the principles we follow – and how they will be applied.

First, the welfare system should always support the elderly, the vulnerable and disabled people.

We will honour the commitments we made to uprate the state pension by the triple lock and protect the other pensioner benefits.

The BBC has agreed to take on responsibility for funding free TV licences for the over 75s and in return we were able to give our valued public broadcaster a sustainable income for the long term.

In the last Parliament we increased payments to the most disabled people and we will not tax or means-test disability benefits.

We will increase funding for domestic abuse victims and women’s refuge centres.

And we are also going to use the remaining funds available in our Equitable Life Payment Scheme, as it closes, to double the support we give to those policy holders on Pension Credit who most need this extra help.

The second principle we will apply is this.

Those who can work will be expected to look for work and take it when it is offered.

The best route out of poverty is work.

Our economic plan has created a record number of jobs, and now a third of a million fewer children are being brought up in workless families.

It is not acceptable that in an economy moving towards full employment, some young people leave school and go straight on to a life on benefits.

So for those aged 18-21 we are introducing a new Youth Obligation that says they must either earn or learn.

We are also abolishing the automatic entitlement to housing benefit for 18-21 year olds.

There will be exceptions made for vulnerable people and other hard cases, but young people in the benefit system should face the same choices as other young people who go out to work and cannot yet afford to leave home.

To make sure work pays for parents, I can confirm that, from September 2017 all working parents of 3 and 4 year olds will receive free childcare of up to 30 hours a week.

Once again, a promise made: a promise delivered.

As a result we now expect parents with a youngest child aged 3, including lone parents, to look for work if they want to claim Universal Credit.

All part of our progressive goal of securing full employment in Britain.

We also want to increase employment among those who have health challenges but are capable of taking steps back to work.

The Employment and Support Allowance was supposed to end some of the perverse incentives in the old Incapacity Benefit. Instead it has introduced new ones.

One of these is that those who are placed in the work-related activity group receive more money a week than those on Job Seekers Allowance, but get nothing like the help to find suitable employment.

The number of JSA claimants has fallen by 700,000 since 2010, whilst the number of incapacity benefits claimants has fallen by just 90,000. This is despite 61% of claimants in the ESA WRAG benefit saying they want to work

For future claimants only, we will align the ESA Work-Related Activity Group rate with the rate of Job Seekers Allowance.

No current claimants will be affected by this change and we will provide new funding for additional support to help claimants return to work.

The third principle that we apply to welfare is this: the whole working age benefit system has to be put on a more sustainable footing.

In 1980, working age welfare accounted for 8% of all public spending. Today it is 13%

The original Tax Credit system cost £1.1 billion in its first year.

This year, that cost has reached £30 billion.

We spend more on family benefits in Britain than Germany, France or Sweden.

It is, in the words of the RHM for Birkenhead the new Chair of the Work and Pension Select Committee, simply “not sustainable”.

As Alistair Darling has said, the sheer scale of Tax Credits is “subsidising lower wages in a way that was never intended.”

So those who oppose any savings to Tax Credits will have to explain how on earth they propose to eliminate the deficit, let alone run a surplus and pay down debt.

We will take the following steps to put working age benefits on a more financially sustainable footing.

Since the crash, average earnings have risen by 11%, but most benefits have risen by 21%.

To correct that, we will legislate to freeze working age benefits for four years.

That will include Tax Credits and Local Housing Allowance. And it means earnings growth will catch up and overtake the growth in benefits.

Statutory payments like Maternity Pay and the disability benefits – PIP, DLA and ESA Support Group will be excluded from the freeze.

Mr Deputy Speaker, we are also going to end the ratchet of ever higher housing benefit chasing up ever higher rents in the social housing sector.

These rents have increased by a staggering 20% since 2010.

So rents paid in the social housing sector will not be frozen, but reduced by 1% a year for the next four years.

This will be a welcome cut in rent for those tenants who pay it and I’m confident that Housing Associations and other landlords in the social sector will be able to play their part and deliver the efficiency savings needed.

We also need to focus Tax Credits, and Universal Credit, on those on lower incomes, if we are going to keep the whole system affordable and able to support those most in need.

So from next year, we will reduce the level of earnings at which a household’s Tax Credits and Universal Credit start to be withdrawn.

The income threshold in tax credits will be reduced, from £6,420 to £3,850.

Universal Credit work allowances will be similarly reduced – and will no longer be awarded to non-disabled claimants without children.

The rate at which a household’s Tax Credit award is reduced as they earn more will be increased, by raising the taper rate to 48%.

The income rise disregard will be reduced from £5,000 to £2,500 – the same level at which it was originally set in 2003.

Taken all together, the freeze in working age benefits, the downrating of social rents, and the focus of tax credits and Universal Credit on the lowest income households will reduce the welfare bill by £9 billion a year by 2019-20.

The fourth principle we will apply to our welfare reform is this: the benefits system should not support lifestyles and rents that are not available to the taxpayers who pay for that system.

We have already introduced a cap on the total amount of benefits any out of work family can receive, at £26,000.

It encouraged tens of thousands into work.

We will now go further, and reduce the benefits cap from £26,000 to £23,000 in London, and £20,000 in the rest of the country.

We are also going to require those on higher incomes living in social housing to pay rents at the market rate.

It’s not fair that families earning over £40,000 in London, or £30,000 elsewhere, should have their rents subsidised by other working people.

And we’ll turn support for mortgage interest payments from a benefit to a loan. Another decision that most families make is how many children they have, conscious that each extra child costs the family more.

In the current tax credit system, each extra child brings an additional payment of £2,780 a year.

It’s important to support families, but it’s also important to be fair to the many working families who don’t see their budgets rise by anything like that when they have more children.

So this is the balance we will strike:

In future we will limit the support provided through tax credits and Universal Credit to two children.

Families who have a third or subsequent child after April 2017 will not receive additional Tax Credit or UC support for this child.

Support provided to families who make a new claim to Universal Credit after this date will also be limited to two children.

And we will make similar changes in Housing Benefit too.

There will be provisions for exceptional cases including multiple births.

In addition, those starting a family after April 2017 will no longer be eligible for the family element in Tax Credits.

Nor will new births and new claims be eligible for the first child premium in Universal Credit.

We will make similar changes in Housing Benefit, by removing the family premium for children born or claims made after April 2016.

This approach means no family sees a cash loss.

And as promised, child benefit will be maintained.

These changes to Tax Credits are not easy but they are fair, and they return tax credit spending to the level it was in 2007-08 in real terms.

When we came to office in 2010 this country had reached the point where a benefit that was intended to support lower income households, was instead available to 9 out of 10 families in this country.

Now, our properly focussed reformed Tax Credit system will provide support to 5 out of 10 families – a much more sustainable balance in our welfare system.

Taken together, all the welfare reforms I have announced will save £12bn by 2019-20 and will be legislated for in the year ahead, starting in the Welfare Reform and Work Bill that will be published tomorrow.

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