From the TUC

What has been announced on the welfare cap?

19 Mar 2014, by in Society & Welfare

Earlier today the Chancellor announced further ‘details‘ on the welfare cap. This included the expenditure limits that benefits within the cap will be subject to, and the list of which entitlements will fall within the cap’s reach.

Firstly, we found out that the forecast margin that will be apply to the cap is only 2%, and that most working age benefits and tax credits are now subject to the cap’s requirements.

As the Chancellor claimed ‘cyclical unemployment benefits’ are excluded (which includes Housing Benefit to those out of work) but many other benefits which are clearly related to the economic cycle have not escaped. Tax credits and in-work Housing Benefit are a case in point. Although the OBR recognises that recent increases in Housing Benefit have been driven by increasing numbers of working claimants experiencing falling real wages, the government has not seen fit to recognise the link between wider economic performance and expenditure levels for these and other benefits.

Pensioners have also failed to fully escape the cap with a number of pensioner benefits, including Pension Credit, Housing Benefit and Winter Fuel Allowances, subject to the cap’s requirements (although the state pension sits outside it). Inclusion have estimated the costs of these benefits to be £15bn – a substantial proportion of overall capped expenditure (which the OBR assess is worth around £115bn this year, about 55% of all welfare spend).

The cap also includes a great many benefits that go to people in work – with Statutory Adoption Pay, Maternity Pay, Universal Credit, Child Benefit and Tax-Free Childcare all included, it will be hard for the Chancellor to present this measure as a means to reduce the costs of the apparently workshy.

Some benefits have been moved out of the cap, and out of AME altogether. This includes discretionary housing payments (DHPs) and council tax benefit. While this classification change is not new, it does set a worrying trend. The minute a social security benefit moves into a departmental budget the likely level of spending constraint it faces increases substantially, even beyond the limits of the welfare cap. While in some cases there may well be good reasons for making such shifts, to date reclassification has been used as a means to arbitrarily limit benefit generosity, so that provision is entirely dependent not upon need but departmental budget limitations. For example, regardless of the number of eligible cases for DHPs, the amount spent will never be able to exceed DWP expenditure limits. If more eligible people apply than can be helped then some will simply have to do without or eligibility criteria overall will have to be toughened far beyond original intentions.

It also transpires that to accompany the cap the OBR will now be asked to produce a new annual report on trends in welfare spending, the first of which will be published this Autumn. While it’s hard to see many benefits from politicising welfare spending in this way, perhaps one advantage is that at least accurate information as to the trends driving AME spend will emerge. Even in today’s short analysis of welfare trends, the OBR took the opportunity to point out that the main factor driving higher spend in recent years has been the state pension and that benefits for children and working age claimants are set to fall extremely sharply over the years ahead.

There are some key unanswered questions about the cap’s operation. We know that if the government looks set to breach the cap (and its 2% forecast margin) they will have to gain parliamentary approval to do so. But quite what governments will and will not be able to do to avoid breaching the 2% limit is unclear. Concerning analysis from Inclusion suggests that even within the context of current social security cuts forecasting errors have meant that expenditure between 2012 and 2013 rose by 4 per cent – a result of higher than expected caseloads on Employment and Support Allowance and Housing Benefit. In this scenario would government be required to arbitrarily cut another non-connected part of the welfare budget to take account of higher demand for Housing Benefit, perhaps removing certain tax credit elements or imposing a substantially reduction in Child Benefit? Would usual uprating procedures be subject to arbitrary change? There is a real risk that with such a small margin for error, and such a limited definition of cyclically affected social security spend, that unavoidable forecasting inaccuracies could mean severe cuts in entitlements elsewhere in the system.

As this TUC analysis (undertaken for us by Declan Gaffney) shows, the idea that welfare spending is out of control has always been wrong. The UK spends below the OECD average on benefits as a proportion of GDP and before the recession welfare spending was falling on that measure.  From that perspective a cap is not needed. But if we are to have one, it should at least have the flexibility within it not to lead to perverse outcomes and to enable governments who want to do more to help particular population groups to do so without creating a parliamentary bust up. Just two days ago the coalition introduced a new form of ‘welfare’ support, as it appears that its new ‘tax free childcare’ policy is within the scope of the cap. The ability to choose to introduce this new type of measure without having to dramatically slash welfare spending elsewhere should not be removed from government decision making. Of course new costs need to be accounted for, but requiring all ‘welfare’ spending costs to be met from within the expenditure headings within the cap is limiting – tax rises, or spending shifts elsewhere, should also be able to be used to pay for new initiatives. Lets hope that even if the cap is to have cross party support that its design will be up for debate.