It’s clear now that the government will come nowhere near to meeting the fiscal targets it set three years ago. The projections have fallen short on every front. GDP is 5.2% less than the OBR forecast in 2010, the hoped-for tax receipts have not come in and borrowing remains high. In its June budget, shortly after it won the election, the Coalition pledged to reduce public spending by 4 percent in real-terms by 2015. (See Page 44.) According to the OBR’s most recent forecast, the figure is likely to be closer to 2 percent. As a result, much of George Osborne’s deficit reduction plan has been kicked down the road into the next parliament.
Why is it proving so hard to cut public spending? Is it because the lazy feckless public servants are not cutting costs quickly enough?
Doubtless some might like you to think so but, if anything, government departments, councils and the NHS are cutting even faster than expected. Failure to cut spending can’t be blamed on the providers of public services. They have done their bit and more.
But while departmental spending has fallen, the reduction in social security costs that was supposed to come with the recovery hasn’t materialised. (See previous post.) Workers have been hit with wage cuts and many of the new jobs that have been created since the last election are low paid. Even though they are off the unemployment register, the job-holders still have to be supported with in-work benefits. It’s not much better for the self-employed. Many of the much vaunted new entrepreneurs are doing little more than making ends meet.
Perhaps more worrying is that, even when the economy starts to grow again, this pattern looks set to continue for much of the rest of the decade. Our weak GDP growth will probably do little more than keep pace with rising debt interest and persistently high social security costs. (See last week’s post.)
Projections by the Resolution Foundation, based on government figures, show the overall welfare bill continuing to rise slightly from this year in real terms.
Much of this is due to the increasing cost of payments to pensioners. However, some other categories of social security spending, notably Housing Benefit, also remain stubbornly high. Usually, when countries come out of recession, there is a virtuous circle of rising GDP, increased tax revenues and falling welfare costs combining to eliminate the deficit-to GDP ratio. This time, though, it looks as though the post-recession welfare dividend will be a long time coming.
It’s no use blaming the unemployed for this. Unemployment benefits only account for about 3 percent of social security costs. Making people wait a week to claim Job Seeker’s Allowance isn’t going to make much difference to the overall benefits bill. (It will, however, make a lot of difference to those who have to wait.)
The figures for Housing Benefit tell us a little more about what is going on. According to Ian Mulheirn of the Social Market Foundation, around a quarter of Housing Benefit now goes to people in work. The poorly paid, rather than the jobless, have been behind much of the rise in Housing Benefit costs over the past few years. Although there have been claims that rapacious landlords have pushed up state-subsidised rents, Declan Gaffney reckons that most of the increase in Housing Benefit costs is due to need rather than greed:
Given how much we spend on housing benefit in the private rented sector it would be surprising if there were no landlords taking advantage. But the hard lesson is that this probably has little impact on overall spending levels. Claims from the left that billions are being wasted “subsidising” private landlords are about as convincing as claims from the right that billions are being wasted subsidising irresponsible tenants to live in mansions.
The continuing high level of Housing Benefit predicted by the Resolution Foundation is therefore quite worrying. If it’s not due to greedy landlords then it must be because lots of people will still need to claim. If Job Seeker’s Allowance falls and Housing Benefit doesn’t, it suggests that a lot of people will be moving from unemployment into jobs that still don’t pay enough to cover their housing costs.
All of which indicates that the slow recovery may take some time to feed through into increased earnings. Many of the new jobs created may be similar to those we have seen over the past three years; part-time, low-paid and precarious.
The cost of social security is being treated as if it’s a cause of the country’s fiscal problems rather than a symptom. Just hammer the claimants a bit harder and the costs will come down. But high benefit costs are not a cause, they are a symptom: of an ageing society, a low wage economy and the weakest recovery in statistical history.