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.