From the TUC

Can a benefit cap ever be progressive?

07 Jun 2013, by in Society & Welfare

There was a lot to praise in Ed Miliband’s recent speech on social security. A committment to tackling long-term unemployment and worklessness through Job Guarantees and a clear indication that a reinvigoration of the contributory principle is on the table are welcome developments. The speech also showed a strong understanding that addressing the low pay and insecure work that characterise too much of our jobs market needs to be part of a welfare reform agenda, territory too few politicians have ventured into for too long.

Perhaps most importantly, the speech drew a line in the sand on the benefit fraud debate – it is vital that progressive politicians find a language to talk about the minority who play the system while recognising the legitimacy of the majority of claims, and this was a brave attempt to start that discussion.

But, the speech also included a committment which provides more cause for concern – a three year cap in AME expenditure.

The Chancellor’s 2013 Budget announced that:

The Government will strengthen the spending framework by introducing a firm limit on a significant proportion of AME, including areas of welfare expenditure. This will be designed in a way that allows the automatic stabilisers to operate to support the economy. Action to improve control over AME spending will support the delivery of fiscal consolidation. An update will be provided at the Spending Round.

Following yesterday’s speech Labour are now committed to a ‘cap on structural social security spending’, following Ed Miliband’s announcement that each Labour spending review will include a cap over the three years of that review.

It’s an open question as to whether  a ‘cap’  is tougher than ‘a firm limit’  but you could argue that Labour now have the more restrictive policy, having signed up to setting an absolute limit on anything classified as ‘structural’ (presumably as opposed to cyclical) expenditure. In contrast, the current HMT formulation leaves the door open with respect to which part of AME spend will be limited, and whether some ‘structural’ spending (for example, higher than expected expenditure on housing benefit or tax credits as a result of unforecast change) will be excluded.

This distinction arises in part because both proposals rest on a different premise as to how social security expenditure is best controlled. While the Government’s AME limit has been presented as a means to reduce an apparently overly generous set of benefit entitlements, Labour has sought to present its cap as a method to drive progressive policy change, identifying looming expenditure problems and incentivising action.

This difference is very visible in statements from respective sides. While the Chancellor announced that his ‘new limit’ will “bring real control to areas of public spending that had been out of control” the leader of the opposition believes that as well as controlling costs his cap can “alert the next Labour government to problems coming down the track”, driving change in policy around areas including housing and long-term unemployment.

Labour are right to steer away from presenting claimants as riding the wave of an uncontrolled AME boom.  The available data show that the driver of future rises in AME costs is expected to be pensioner expenditure (and so far we have no idea if either party will include pensioners in their AME cap), and as Declan Gaffney has regularly shown, as a share of GDP working age benefit spending was pretty much stable in the 20 years before the financial crisis.

But the Labour policy does still seem to have a flaw: the idea that, particularly at a time of extremely tight public finances, Government policy can successfully control any ‘structural’ drivers of social security spend over a three year period appears, at best, optimistic. While increasing the coverage of the Living Wage and increasing local authority powers to invest Housing Benefit savings in house building are both excellent ideas, their capacity to significantly impact on national trends in the spread of low wage work or the rate of increase in private rents over a 12 month period (which would be the type of timescale necessary if the identification of a trend and implementation of a solution were to take place over a three year cycle) appears to me to be limited.

Most worryingly, within Labour’s policy, if a Government was unable, in the short-term, to turn such trends around it would no longer be able to revert to redistributive policies to offset the negative economic and social impacts of low pay and rising living costs, but would be tied by an expenditure cap which at worst would cut the incomes of those who were already the poorest. We know that as middle income families saw their wages stagnate from the mid-2000s tax credits stepped in to prop up family incomes. Had Labour’s AME cap been in place that approach could have been limited.

There are also some practical challenges to implementing the proposal. The policy proposes a three year limit. But is it really possible to forecast ‘structural’ spending accurately within this period? It seems unlikely. And for a Department with a very large AME budget compared to a far smaller DEL total (around 5 per cent of DWP expenditure is DEL) small shifts in AME costs could lead to considerable pressures on areas like the Jobcentre Plus network or benefit administration teams.

And how will the mechanisms of Government be adjusted to make this approach work? When lack of housing is identified as a problem for the private rents driving DWP Housing Benefit spend, what will make the Department for Communities re-focus its priorities on increasing the number of houses rather than any one of the other areas its Ministers may want to fund? In fact, given the spending restrained environment the next Government will be operating it, what will happen if the Government measures that could make a practical difference to a ‘structural driver’ simply can’t be afforded at all?

It’s also far from clear that every ‘driver’ of rising social security costs has an associated action that Government could take. For a period of time over the last few years inflation, for example, has been higher than forecast. Unless this rise was to be classified as a ‘cyclical’ change presumably its impacts would be included within the cap – and the consequences could be significant.

In addition, in an optimistic scenario, how would a cap interact with higher than expected rates of GDP growth? While it currently seems a very far way off, were the public finances to return to full health a cap could work to limit the extent of AME spend. But more likely it would mean that if a future Chancellor wanted a giveaway budget they would have to find a way of classifying their proposal as DEL.

There appears to be no international examples of such a policy every having been successfully implemented elsewhere (answers on a postcard should you come across any), and while Labour’s aspiration to use a cap to secure progressive policy success is far better than the Government’s cost cutting agenda, the former runs into the significant problem that to date none of the policies on offer look likely to have a significant impact on AME totals – leaving the likely actual impacts of the Government and Labour policy surprisingly similar. Is it better to have a cap that you present as progressive which ends up with regressive concequences, or to present the cap as regressive in the first place? You could argue that the former approach helps shift the terms of the debate, or you might also say that it helps disguise the real policy concequences of the initiative.

As Declan Gaffney suggests, perhaps there’s little point in seeing such a cap are more than a politically necessary rhetorical device. The politics are clear, the Government trap obvious and, as Declan says, given ‘structural’ spend as a proportion of GDP is unlikely to experience a boom any time soon, maybe a cap that is framed in the right way will have no significant negative impacts. But on the other hand if we are looking at firm limits on nominal cash totals, the concequences could be concerning.

There was a huge amount to welcome in yesterday’s speech, and the aspirations that Labour increasingly profess for a fairer and more equal society are refreshing and important. But while a focus on lifting living standards and reducing low pay and high rents is welcome, committing to address these challenges in less than one parliament may turn out to have been too ambitious.