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19 November 2015updated 09 Sep 2021 2:22pm

Following the tax credit row, the welfare axe could fall on renters and disabled claimants

What are the options for the Chancellor to save £4bn from the welfare budget to smooth his cuts to tax credits in the upcoming spending review?

By Bill Davies

The Chancellor is backed into a corner on tax credits – reduce the cuts or face an electorate who now distrust his plans for in-work benefits. Universal credit (UC) is one of the options that Osborne is looking at to save some of this £4.4bn.

Much of the focus so far has been on the savings he could achieve by increasing the amount of benefit that is withdrawn for every pound earned (the taper rate). We argue here that other elements of UC are vulnerable, assess the potential impact of cutting these elements and cost the potential savings. The impacts of these potential savings would be comparable to those the Chancellor is now under pressure to reverse  cutting the incomes of the poorest and most vulnerable families  relocating the pain rather than removing it.

In the summer budget, UC was cut drastically, mostly in the form of cuts to work allowances (the amount of earnings before support starts to be taken away). These allowances could be cut further, further weakening work incentives and reducing incomes. But a more likely outcome would be cuts to other parts of UC. There are two main ways that this could be done: taper rates and elements.

The taper rate (the amount of benefit that is taken away for every additional pound earned) is currently 65 per cent, but there are suggestions that it could increase to 75 per cent. Analysis by IPPR has found that raising the taper rate to 75 per cent would bring in £2.6bn in 2020. This compares to £3.3bn raised by work allowance cuts in 2020, as announced in the summer budget. A taper increase would affect all households who are earning more than the (now very low) work allowances – and would reduce the returns to work for these low income households. It appears that protests from Iain Duncan-Smith, who refuses to see UC further undermined, have made this option unlikely.

The second – and more likely  way the Chancellor may look for savings is in the UC “elements” (the value of the benefit awarded to each household/individual before the taper kicks in). The sums involved in the different elements of social security are considerable. For instance, around £25bn is spent on housing benefit per year, and around £13bn is spent on Employment Support Allowance (the replacement for Incapacity Benefit). Both of these elements are particularly vulnerable, given that they have been targets of recent reforms, and in particular target out of work benefit claimants.

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The government have a number of options on cutting the ‘housing element’ of UC (currently housing benefit). One of the more likely is reviewing the Local Housing Allowance, the housing benefit subsidy in the private rented sector. In 2012, LHA was adjusted to subsidise rents at the 30th percentile of the market down from the 50th percentile (ie. rent subsidies used to fund rents in the middle of the rental market, and now correspond to rents in the bottom third). The government could for instance, reduce this to the 20th percentile of the market, saving an estimated £400m a year according to the IFS. Evidence shows that this does not generally reduce market rents – rather tenants end up paying more for where they live. This would be particularly damaging in high cost housing markets where, due to successive freezes to LHA rates coupled with rent rises, fewer and fewer properties are available at the 20th percentile of the market, let alone the 30th.

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A second, similar option would be to make all housing benefit claimants pay 10 per cent of their rents – thus automatically saving around £2.4bn per annum, and affecting 4.8m households (IPPR analysis). While this might incentivise households to look for cheaper properties, for households living in the private rented sector, the average impact would be a loss of income of around £570 per year, and £460 per year for social housing tenants. Again, the impact would be particularly hard on those living in high cost housing markets, like London, Cambridge, York and Oxford.

Given recent trends, disability benefits may be also be targeted, as they were in the March budget with little fanfare but a potentially major impact. The budget announced that new claimants of Employment support allowance (ESA) Work Related Activity Group  who DWP consider will be able to work in the future – will from 2017 have their ESA benefits cut to jobseeker allowance rates – a cut of around £2,000 per year per claimant (for a claimant claiming for the entire year). Were the government to repeat this process for the other group of ESA claimants, by moving all Support Group claimants (those who have no current prospect of being able to work due to severe health problems), whose average claim is £137 per week to the current WRAG rate (averaging £113 per week), then this would result in a loss of income to seriously disabled people of around £1,200 per year, saving around £1.4bn a year.

The Chancellor is likely to seek savings to offset a partial tax credits U-turn in the years preceding the roll out of UC (from 2016/17), rather than exclusively at the end of the parliament (when UC is fully rolled out). The potential cuts described above could apply to the current system, and effectively roll over to UC. Though most families are yet to migrate to UC, it is changes to this system that will affect families in the long term. Yet the value of and distribution of support under UC will evolve from the current system  both should therefore be under scrutiny at the spending review and beyond.

UC could work well for millions of low income households. It simplifies the benefit system, smooths transitions in and out of work, and gets rid of tax credits’ income traps. But it is unlikely to survive further raids without ending up an ineffective poverty reduction tool that punishes the poorest households in the UK. Reversing the tax credit cuts by cutting universal credit will shuffle around this nasty outcome rather than stop it  and would hit families that are unable to compensate for their loss of income (such as those for whom disability precludes paid employment).

But Osborne doesn’t have to push the damage into UC – the Treasury would still achieve a surplus without any further cuts to either welfare system.

Giselle Corry and Bill Davies are senior research fellows at the Institute for Public Policy Research (IPPR).