A couple of reports on welfare social security spending came out either side of Christmas.
The Institute for Fiscal Studies noted that, while spending is forecast to fall as a percentage of GDP, it is still set to rise in real terms during the next parliament. Even with a growing economy, benefits will still be a larger proportion of GDP at the end of the decade than they were before the recession.
More than half of the benefit spending goes to pensioners:
Total spending on benefits, tax credits and state pension in 2015–16 is forecast to be £220 billion, equivalent to 29.5% of overall government spending, and 11.6% of GDP.
Of this total, around £121 billion is forecast to be paid to pensioners: they will receive £92 billion in state pensions, and around £29 billion in other benefits such as pension credit, housing benefit and disability benefits. The remaining £99 billion of expenditure will go to working age families, both those in work, and out-of-work.
The components are easier to see from the second report, published last week by the House of Commons Library.
The figures are slightly different but the pattern is more-or-less the same – a slight fall followed by a rise again towards the end of the decade.
Pensioner benefits are pushing up the total but some of the other benefits are falling very slowly or, in some cases, not at all. HMRC expects spending on tax credits to rise in real terms by 2020.
George Osborne is still talking about reducing social security costs by £12 billion. But the prime minister has promised to protect pensions and, as older people are more likely to vote, it is unlikely that the Conservatives will go into the election promising major cuts to pensioner benefits. That only leaves the £99 billion of working age benefits to go at.
The government’s attempts to cut benefit spending have so far fallen well short of their targets. Changes that were meant to save £19 billion only reduced costs by £2.5 billion. Housing benefit, says the IFS, has proved be particularly stubborn:
Housing benefit explains £3 billion of the extra spending. Despite announced cuts of over £2 billion, real terms housing benefit spending will be nearly £1 billion higher in 2014–15 than 2010–11. This was unanticipated – the OBR’s welfare trends report shows expected spending in 2014–15 has risen by nearly £3 billion since their June 2010 forecast. As they explain, the private rented sector has grown faster than expected, private rents have grown faster than expected, and earnings have grown more slowly than expected – all of which increase housing benefit spending.
And something similar is happening with tax credits:
That slower-than-expected earnings growth also increases tax credit spending.
All this has important fiscal consequences. Working-age benefit spending has always been sensitive to the unemployment rate. But the rapid growth of housing benefit and tax credits over the couple of decades (documented in this briefing note published today) means that slow earnings growth now has the potential to push up spending too.
The government has made a big deal about how its welfare reforms have encouraged people to go back to work. That may be true but it’s not going to do much to reduce benefit spending in the future. The unemployed now only receive about 15 percent of housing benefit spending and unemployment benefits are only just over 2 percent of total social security costs.
As this chart from the OBR report shows, while employment has risen since the recession, the percentage of employed people receiving housing benefit has gone up too
Nudging people back into work has just changed a lot of people from JSA claimants to tax credit claimants and from unemployed housing benefit recipients to employed housing benefit recipients.
If there ever were any work-shy claimants, there aren’t enough of them now to account for much of the benefit costs. Any significant reduction in the social security budget will therefore have to come from cuts to the benefits of the working poor and the disabled.
Against this background, it is difficult to see where savings of £12 billion could come from. Michael O’Connor produced this wonderful pie-chart showing how much the welfare cap cut from the working age benefit bill last year.
A cut of £12 billion to an overall cost of £99 billion is roughly an eighth which, I’m sure you’ll all remember, is 45 degrees on a circle, or, as I like to think of it, North to North East. Some way to go then.
Without big reductions in tax credit or housing benefit spending, it’s unlikely that the government will get anywhere near savings of £12 billion. The only way housing benefit and tax credit costs will fall is if a lot more people are paid a lot more than they get now. If that were to happen, some of them might even manage to pay more in tax, which would improve things on the income side too. Unfortunately, that doesn’t look very likely either.
Flip Chart Fairy Tales 
This is of course the reason why we have what, on the face of it, is the slightly odd situation of David Cameron & George Osborne arguing for the minimum wage to go up “substantially” – it will have a knock-on effect of pushing up the wages of lower earners, which will then reduce their eligibility for tax credits. In effect it is reducing the state’s wage subsidy to employers.
>>the slightly odd situation of David Cameron & George Osborne arguing for the minimum wage to go up “substantially”
What do you mean “arguing for”? They are in office – why didn’t they just do it? You almost think there was an election on, and they were trying to get people to focus on what they say, rather than what they actually do.
The minimum wage is set by an independent body, the Low Pay Commission (rather like the MPC sets interest rates). So Cameron/Osborne can’t do it anymore than Brown/Darling could have done in previous govt
The LPC is a purely advisory body – the government can (and has) gone in a different direction to the advice.
Yeah:Right.
More people forced into bogus self-employment or shoved onto zero-hours contracts.
Many more dumped from 40 hour weeks and going to part-time work.
There is a whole industry telling employers how to work around the minimum wage, and plenty of people who will work cash-in-hand if someone will pay them. Maybe George expects them to declare that income for tax. I think people will just do an amazon on it.
I agree with you. The other factor connected to this subject is the ‘supposed’ skills shortage. Precarious forms of paid work (zero hours, pseudo-self employment, temporary contracts, employment agent-mediated contracts), undermine the development of skills for the future. This is not lack of capability or lack of desire in the ’employee’ it is down to their willingness to spend time and money developing themselves for some unknown quantity to exploit them at some future point. ‘Employers’ meanwhile bleat about not being able to buy the skills in the marketplace and take the easy route by filching skilled ops from abroad. This source will inevitably dry up. People are getting increasingly wise to the short changing happening in this lop-sided market. I think people would much rather earn a proper living wage paid for by their employer (what’s the difference for suits who have share options?) rather than have to work and claim benefits.
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In your previous blog on the deficit I argued that the primary reason for the weak tax revenues was likely to be the enormous direct tax cuts that we have seen since 2007 – leading to a structural reduction in the government revenue – rather than labour market reasons.
Here again I argue that – given the success of reducing the numbers on welfare over the past 40 years – under all governments – there is no reason why policy changes associated with welfare to work and administrative changes to benefit processes that further strutural reductions in the numbers on welfare (and the consequent increases in employment that I believe largely explains the ‘productivity puzzle’) can be achieved. [Of course the usual disclaimer that past performance is not a necessary predictor of future performance needs to be mentioned.]
At 900 thousand unemployment benefits are over 2 1/2 million lower than the 1986 peak when welfare to work was re-introduced with ‘Restart’. Further falls are likely back to around 2008 levels which were the lowest levels for over 40 years.
From the early 1990s welfare to work moved on ‘inactive’ working age benefits and the current level of 3.1 million – despite a recent rise – is back to levels not seen for over 20 years and down over 3/4 million from its 1996 peak.
These inactive benefits includes the numbers on lone parent benefit at their lowest level for over 30 years and at 460 thousand less than half their mid 1990s peak and Incapacity benefits down a 1/4 of a million from its mid 1990s peak at 2.52 million.
Of course there is more to do and some is in train – the equalisation of the state pension age which is applying welfare to work to older females. The biggest other challenges/opportunities for reduction are Incapacity Benefits and housing benefits. It has proved more difficult to find the appropriate policy for even more substantial reductions in incapacity benefits but it may be that there has not been the right balance between checking eligibility for the benefit and helping the people on to work once on the benefit.
On housing benefits again I suspect that it is administrative reasons for the recent growth rather than labour market issues. Given that most wages remain substantially above benefit levels (which are low by international standards but the issue is confused by housing benefit) I think that the problem is not because of more people becoming eligible for housing benefit and tax credits.
Some of the housing benefit issue, I hope will be addressed when – as part of Universal Credit – housing benefit is incorporated into the main benefits. And then the housing benefit can be ended at the same time as when people (get a job and) leave the main benefit rather than informing the local authority who then are likely to take some time to close down the housing benefit claim.
By pushing/subsidising high house prices the government has managed to increase rents and therefore push more working people into housing benefits.
The same time the ConDems have also subsidised the BTL brigade so it is a big question on why they do not raise taxes from the BTL/property investors in order to support the PRS tenants?
People stopping a benefit claim also stop receiving housing benefit at the same time, since the benefit agency notify the local council of the change of state. Housing benefit for the working poor is dependent upon regular notification of wage, by the claimant giving the council evidence of income…a wage slip. Each month.
It takes some time to pass the information from one system to another and then to deal with it. For example, when the Manpower Services Commission was set up in 1974 the administration of benefit was separated into benefit offices and jobcentres. By 1982 when the same people were being measured in benefit offices (claimants) and Jobcentres (registrants) there were between 200-300 thousand more registrants than claimants.
Most of this was probably due to the time it took for the Jobcentre to close down the benefit claim. However, some of it was probably also due to different eligibility rules for registrants and claimants.
And the difference is greater the longer is the period of the claim. For example, when ‘signing on’ was twice weekly – rather than fortnightly – it was possible to find out earlier that people had got a job and close down the claim quicker without needing to reclaim the money from the claimant.
Similarly, when the focus was on dealing with the individual rather than their benefit or eligibility status (e.g. when contributory and means tested unemployment benefits were combined into one benefit (JSA) or when the administration of benefits and conditionality was combined in Jobcentre Plus) there were substantial reductions in the numbers on the benefits.
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