Since its announcement in January 2014, the promised £12bn cut to welfare has developed an almost mythical status. Today, 18 months later, the chancellor finally answered the question of where the axe will fall.
The first thing to note is that he has identified the full £12bn but given himself an extra year to make the savings – and he is right to take longer.
He is also right to focus on the need to cut the cost of two of the biggest areas of non-pensioner spend: Housing Benefit (£25bn) and Tax Credits (£30bn). There are, however, some significant problems in the way he is going about it.
Whilst there may be some logic in the argument that people on benefits should have to consider the affordability of having more children, restricting Child Tax Credits to two children may actually prove counter-productive. Around two thirds of Child Tax Credits go to people in work on low incomes, the very “working people” the government has pledged to stand for. This change may lead to some families deciding that work doesn’t pay. So too the higher taper rate the chancellor is introducing.
The other big announcement aimed at reducing Tax Credit spend is a new National Living Wage. It is set to rise to £9 an hour by 2020, starting next April at £7.20. Calling it a “living” wage seems disingenuous when the Living Wage today is already higher than £7.20 (both in and out of London). Increases to low wages are, however, a good thing, but we should be wary of the 60,000 job losses the chancellor also announced. These are likely to be amongst the least skilled and there’s a danger they may not move into the new jobs being created over the Parliament.
On Housing Benefit, the Conservatives confirmed their commitment to excluding 18-21 year olds from eligibility. Like the reduction in the level of the household benefit cap, this saves little but is likely to be popular. The surprise announcement was the 1% cut in social housing sector rents. Housing providers will have something to say about that. When the biggest issue is the need to build more social housing, this cut in provider revenues, coupled with the proposed extension of Right to Buy, looks dangerously like bad policy.
The most radical component of this latest tranche of welfare reform is the reduction in the rate paid to people in the Work Related Activity Group of Employment and Support Allowance (ESA). Reform recommended this last month. Currently costing around £14bn a year, ESA repeats the perverse financial and non-financial incentives of its predecessor Incapacity benefit. It needs a fundamental overhaul and the rate is one element of this. Crucially, in conjunction with the rate change, the chancellor announced increased investment in support for this cohort to move into work.
The bulk of the welfare changes announced today are straightforward cuts, and for some poor families are likely to make them poorer. Creating a more sustainable system for the long term will require a more strategic approach to tackling the drivers of spend. This is not what the chancellor delivered in his Budget today.