The working poor and the welfare cap

The details of the government’s planned cap on welfare budgets is published in the OBR’s Economic and fiscal outlook. It’s interesting to see what’s in and what’s out.

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The main benefits for the unemployed and, of course, pensions, are outside the cap. The big lumps inside the cap are tax credits, housing benefit for those not unemployed and disability benefits. As I said in January, any attempt to cut the benefits bill will have to hit the working poor. Pensions are protected and, despite all the rhetoric about the work-shy, the unemployed don’t account for that much of the social security costs.

It’s all very well to say you are going to cap these benefits, though. The trouble is, the forces pushing up in-work benefits haven’t gone away. A recent paper by the Resolution Foundation forecasts that, after falling slightly, the cost of housing benefit and tax credits will rise again in real-terms towards the end of the decade.

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If average pay is likely to stay low for some years yet, and it’s not just the lefties who are worried about this, then it is hardly surprising that the need for in-work benefits is likely to remain high.

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As long as there are significant numbers of the hardworking poor, which it looks as though there will be for some time, pressure on the benefits bill won’t ease by much.

Gemma Tetlow of the IFS made an interesting comment on Thursday:

Recent experience suggests that forecasting changes can cause upwards revisions to ‘welfare in scope’ of this scale

• Example:

  • –  Between Budget 2011 and Budget 2012 economic forecast deteriorated significantly
  • –  As a result, forecast for welfare spending increased
  • –  Forecast for welfare in scope spending in 2015–16 was more than 2% higher in Budget 2012 than it had been in Budget 2011

Which is a polite way of saying that, if the country can’t create enough well-paid jobs to get people off in-work benefits, the welfare cap might have to be quietly raised.

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4 Responses to The working poor and the welfare cap

  1. P Hearn says:

    Someone in politics is going to have to fess up to the public that the options are:

    1. continue to spend money we don’t have on benefits we can’t afford as has been the case since 1948

    or

    2. we’re going to have a massive increase in taxation on the top 40% of earners (the ones who make any net contribution at all) so that they can fund these benefits AND eliminate the deficit AND start to pay down the debt.

    Which politician is going to advocate option 1?

  2. The tolerances allowed in the cap seem pretty small considering the degree of uncertainty over the welfare reform timetable. The move to universal credit, the conversion of disability living allowances to personal independence payments (with anticipated 20% savings) and the introduction of single tier pensions (the latter uncapped, but set at a higher rate than the basic pension credit, which is capped) will all impact on the total benefits spend and the cappable amount.

    I don’t think it’s really credible to say that benefit spending has been out of control since 1948. Nor do I think that it is now. There are certainly pressures: an aging population, the costs imposed by increasingly unequal earnings, the high inflation rates experienced by the poor, the difficulties families with children experience in competing with their childless peers. But if one were to take a right wing stance, one would say that the coalition has been commendably brutal in clamping down on working age benefits. The working poor, the disabled and the unemployed are certainly significantly worse of than in 2010, their high earning counterparts noticeably less so. As for net contributors, that depends on what you mean: many high-earning self-styled wealth creators are wealth concentrators at best.

  3. steve says:

    Tough and unpopular decisions have to be made regarding the state pension. We now have a class AND age war.

    Housing benefit and Tax credits are the main factors of the rise inside the welfare cap. A major state housebuilding program and major infrastructure projects to boost employment will help to reduce these. Child benefit for anyone earning over 30K needs to be axed! And child benefit should only be given for the first 2 children. This would be a start.

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