£12 billion more benefit cuts? Where from?

Has George Osborne been listening to the Institute of Fiscal Studies?

After the Autumn Statement, the IFS said that, to keep the post-election cuts to public services at their current rate, the Chancellor would need to find another £12 billion, either from tax rises or welfare cuts.

Mr Osborne seems to have realised that, as the IFS warned and the OBR implied, cutting  public service spending to 1948 levels would see the state withdrawing from some service provision. This would almost certainly be very messy and would probably involve the financial collapse of some local authorities.

So he’s decided to keep public services cuts running at their current rate of around 2.3 percent per year. To do this, he needs to find £12 billion. He’s not planning to increase taxes, though. He’s going to squeeze the social security budget.

Or, at least, that’s what he said:

I can tell you today that on the Treasury’s current forecasts, £12 billion of further welfare cuts are needed in the first two years of next Parliament. That’s how to reduce the deficit without even faster cuts to government departments, or big tax rises on people.

There’s a problem here though. More than 50 percent of the benefits bill is pensions and pensioner benefits. The day before George’s speech, his boss pledged to increase pensions by at least 2.5 percent per year. That’s half the welfare bill off-limits before he’s even started.

The latest government forecasts, published just after Christmas, show the social security bill staying stubbornly high, even as the economy recovers.

There are two main reasons for this. Most obviously, there are more pensioners each year and their benefits are being protected or even increased. Secondly, the working poor will keep up the pressure on the tax credit and housing benefit budgets for much of the rest of this decade. Forecasts by the Resolution Foundation show Housing Benefit rising slightly in real terms over the next few years. A lot of workers simply can’t afford to rent, let alone buy.

Even if you exclude pensioner benefits, the figures still don’t show much scope for large cuts. The big lumps are Tax Credits and Housing Benefit. Given that most Tax Credits and close to a quarter of working-age Housing Benefits go to people in work, it’s difficult to see how significant welfare cuts could be made without hitting the working poor.

Source: IFS Green Budget

So, given the continuing upward pressure on the benefits bill, where will the Chancellor’s £12 billion come from? As the FT’s John McDermott notes, these cuts will be hard to find. Removing Housing Benefit for the under-25s may not save very much, especially if those with dependent children are protected. George Eaton in the New Statesman points out that may of the much-trumpeted welfare cuts haven’t yielded great savings so far:

For all the human misery they have caused, the household benefit cap is forecast to save just £110m a year by the DWP, while the bedroom tax will raise just £490m (and both, as analysts have warned, may end up costing more than they save by increasing homelessness and other social ills).

I find it hard to believe that the Chancellor can find £12 billion in social security cuts. That’s roughly one eighth of the working-age welfare bill. I’d be surprised if he can find even half that without causing serious distress to millions of people. It might look like a clever political move to hammer welfare claimants but when the cuts start to hit working people, as they inevitably will, public opinion might shift. For the government, news reports of hardworking families being evicted would be as bad as seeing councils and A&E departments collapsing.

But without the welfare savings, we’re back to this.

The 2015 spending/taxation/borrowing dilemma

For all the bluster, cutting welfare is unlikely to make all that much difference.

Update: Duncan Weldon reckons there might be another way out of this. Financial Repression!

Update 2: “George Osborne’s cuts are a squeeze too far,” says IFS director Paul Johnson.