Where Could Further Welfare Spending Cuts Come From?

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Welfare cuts will impact on real people already in poverty
People already in poverty will see their income fall with more welfare spending cuts

The three main political parties all agree on the need to reduce the deficit, and argue that it is fairer to make savings in the working age welfare budget, rather than make spending cuts in other departments.

The Conservative Party has proposed a further £12bn of welfare spending cuts, without spelling out where these savings would come from.

Labour are committed to the welfare cap, limiting welfare spending over the five years of the parliament and the Liberal Democrats also propose savings, albeit more modest savings than the Conservatives.

They have found consensus in cuts to welfare spending, but how the next government chooses to make these cuts will affect people’s pockets as beneficiaries, and their employment prospects, by changing the financial returns from work.

How Universal Credit Impacts on Pockets and Prospects

Our recent review of Universal Credit focused on the impact UC had on reducing poverty by looking at the impact on ‘pockets’ and ‘prospects’. Overall, we found that Universal Credit will increase the money in people’s pockets, and improve their employment prospects.

Reductions in welfare spending will have the opposite effect on people’s pockets and prospects.

A large proportion of in-work households, typically low to middle income earners, are beneficiaries of the welfare system. The government can choose to reduce the amount of support people receive when out of work, or they can choose to lower in-work support faster, as earnings increase.

An example of each of these can be found in each of the manifestos.

  • Out of work support increases are to be frozen or limited, hitting the pockets of people on low incomes.
  • The work allowance, the amount that a household can earn before benefits are withdrawn, has been frozen under both the current system and Universal Credit, lowering the real financial returns from moving into work.
  • The withdrawal rate of tax credits and Universal Credit could be increased, so benefits fall faster as earnings increase, households would face a higher effective tax rate and keep less of their earnings from work.

Benefit cuts hitting out-of-work households are often described as hitting the pockets of ‘shirkers’, particular when increases for disabled people are protected – these changes poll well with the electorate.

However, changes can also hit the employment prospects of some 3.8m in-work families, and reduce the incentive to enter work for those who are unemployed.

Benefit cuts that hit ‘prospects’, as well as ‘pockets’ would undo much of the improvement to work incentives that Universal Credit is being brought in to to deliver.

The Three Root Causes of Rising Welfare Spending

The base requirement for keeping welfare spending manageable is a growing economy, and it is credit to employers and employees that employment has remained high throughout this parliament. However, even with a growing economyeach political party knows that without tackling the root causes of rising welfare spending, any cuts they make to the welfare budget will only be temporary – the bill will continue to rise. Perhaps the most depressing aspect of the welfare debate is that the main drivers of rising welfare spending are well known:

  1. Demography: Pension spending is rising because of a growing number of pensioners, despite increases in the state pension age and because spending on pensioner benefits (including the triple-lock on the state pension) is rising.
  2. In-work support: Tax credits, introduced to help meet the higher living costs faced by larger families and improve incentives to enter work now see £20bn paid to 3.1m in-work families as living costs have continued to outpace wages; in addition, over 1m housing benefit claims are paid to households in work.
  3. Housing: Housing benefit has increased dramatically from £15bn in 2000 to £24bn today as a result of rising rents caused by a lack of new homes. With increases now capped, housing benefit is beginning to lose its relationship with local rents in some areas.

Each of the main parties have made a commitment to maintain the triple-lock on pension, so savings in working age welfare would need to be even higher than if the pain was shared more evenly. The need for higher in-work support is driven by the rising cost of living, including high housing costs.

However, while all of the parties talk about accelerating housebuilding there is little concrete or convincing detail as to how this would be achieved. More recently, the Conservatives have also promised not to increase income tax, national insurance or VAT, which ties their hands on the alternatives to welfare cuts.

The Impending Welfare Bombshell

Earlier on in the election campaign, Grant Schapps, speaking for the Conservatives, took a hammering on Newsnight from Evan Davis over the basis of their ‘Labour tax bombshell’ figure of £3,000.

The Conservative party calculated this figure based on a number of assumptions that the Institute for Fiscal Studies would describe as ‘unconventional’ at best.

Their own methodology, applied across their £12bn of welfare savings concentrated on working age households, would mean a ‘welfare bombshell’ of £7,500 over the course of the next parliament for each family in receipt of benefits or tax credits, a figure that equates to 10 per cent of the working age welfare budget.

Given that working age welfare is already cut to the bone, as shown in the table below, the challenge in finding the required level of savings is a real challenge.

Welfare Savings Announced In This Parliament

Welfare savings to dateSavings 2014-15 (£millions)
REDUCTIONS IN WELFARE SPENDING BY 2014-15£18,080
WELFARE MEASURES BUDGET 2010£11,040
Benefits and Tax Credits Switch to CPI Indexation£5,840
Housing Benefit Changes£1,765
Tax Credit Reforms£3,220
Other Changes£215
WELFARE MEASURES CSR 2010£7,040
Time Limit Contributory ESA£2,010
Withdraw Child Benefit from higher rate tax payers£2,500
Tax Credit Reforms£1,140
10% reduction in Council Tax benefit£490
Other changes£900

I carried out a small piece of work to help identify further savings in 2014, when George Osborne first floated the idea of further cuts in welfare spending. As a best case scenario, I was able to identify savings of £9.8 billion, see the table below for the options.

Possible Future Welfare Savings

Policy MeasureAnnual Saving (£ billions)
Raising the state pension age by a year£3.3
Better targeting of Universal Benefits£2.7
Taxing non-means tested benefits£1.7
Supporting 300,000 workless households into work£1.5
TOTAL ANNUAL SAVINGS£9.8

For a fuller explanation of the savings estimates above, please leave a comment or contact us.

Other suggestions based on analysis from the IFS includes:

  • the already announced freeze on benefit rates, which would save about £1.5bn
  • means testing child benefit which would save about £5bn

Other ideas involve further reductions in out of work benefit levels (child tax credit, housing benefit) or increasing the withdrawal rate of benefits, which would hit employment prospects the hardest, and undo the good intentions of Universal Credit.

The Importance of the Frontline Advisor

Talking about the billions of pounds that needs to be saved can distract people from having to consider the case by case support that the benefit system provides to millions of out of work and in-work households across the United Kingdom.

Our work with frontline advisors at local authorities, housing associations and employment service organisations highlights to us everyday the challenges faced at the sharp-end, by their residents and customers.

We work with the men and women who have to explain welfare policy and the changes from year to year to their customers, and make the welfare system work as best it can.

  • Advisors in Oxford help their residents to take active steps toward independence, alongside the immediate support provided by discretionary housing payments.
  • In Lewisham, advisors told us how surprised they were at the level of need faced by residents affected by the benefit cap, and how important their work was in helping them to take supported steps toward employment.
  • Advisors at Serco and at Jobcentre Plus have told us about the challenges of working with a benefit system where the belief, all too often justified, is that work doesn’t pay and the importance of being able to carry out quick, simple and accurate better off in work calculation.
  • We have worked with up to five different teams within one housing association, each of them asking for the same information from their residents over and over again, helplessly aware of how frustrating this is for them and their customers.

Frontline advisors need to be supported to explain changes in the welfare system, to direct their support where it will be most effective and to influence welfare policy with their experience of how it affects people, where cost-effective policy changes can be made, and how people can best be supported into work.

More Welfare Cuts Will Affect People Already In Poverty

Each political party wants to be the party of working people, and each party wants to make savings in the welfare budget. There is a common consensus (see the Daily Politics debate on welfare spending here) that work is the best route out of poverty, and this, in turn, would help reduce the benefit bill.

However, each political party needs to say where the welfare savings will come from, whether these will be from ‘pockets’ or ‘prospects’, and who will be affected.

Like us, they could learn some valuable lessons by speaking to the advisors on the frontline who deal with real people already affected by poverty, every day.

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