There's a lot of excitement at the prospect of the government - and now the Opposition - putting a cap on Annually Managed Expenditure. But there's nothing new about the Treasury controlling AME
Ed Miliband’s announcement that a Labour government would set a three year cap on welfare spending was a significant change in the party’s mood music. What seemed to get everyone excited was that there were no specifics about the level at which the cap would be. On the other hand, the coalition indicated its own plans to cap welfare spending more than two years ago, repeating the intention at the Budget. But it still hasn’t announced any specifics on how their cap would work either. So I guess they’re all in it together on this one.
The obvious reason for the lack of detail on how the cap would work is that it suits all parties to avoid frightening the horses ahead of the election. But there’s another reason for the lack of concrete proposals: we already have a cap.
All the political chatter about capping Annually Managed Expenditure spending is based on the idea that this part of the budget is, as the chancellor put it in his Budget statement, ‘unmanaged’. The sense is that the Treasury is impotent as it watches the benefits bill spiral out of control. What he really means is that AME, by definition, involves the parts of spending that are demand led: unemployment benefits depend on how many people are out of work, and pensions on demographics.
In managing the public finances the Treasury starts off by forecasting what tax revenues will be for the next five years. Then they forecast what will happen to the welfare bill (and debt interest, among other things) over that period – based on the outlook for the economy and demographic change and the benefit entitlements that are on offer. Whatever is left over is what there is to spend on public services – so-called Departmental Expenditure Limits. As the last in the queue, DEL is, as they say, ‘the residual’.
But just because those are the mechanics for setting spending doesn’t mean that Treasury ministers take no action to change the AME forecast in order to protect spending on public services. Indeed, we all know that substantial efforts have been made by the coalition, and in fact the last Labour government, to cut the underlying welfare bill. The coalition’s changes alone – shaving entitlement levels and tightening eligibility to various benefits - will have cut around £22bn from the annual bill by 2014-15. The Treasury can control structural AME just as much as it wants to.
So by setting the DEL envelope for each spending review, ministers are implicitly telling us what their AME cap is. For example, the government’s current plan is to spend £220.4bn on welfare in 2015-16. That figure would obviously be allowed to fluctuate if the economy performed unexpectedly well or badly in the interim, implicitly making it the structural AME cap that everyone now seems to want.
There was much in the Labour leader’s speech that offers a distinctive Labour agenda, about which there’ll be lots more to discuss. But on aggregate benefits spending, all Mr Miliband said yesterday was that he’d carry on doing what the last government did, and what the current government is doing. AME is dead! Long live AME!
This post first appeared on the Social Market Foundation's website
