Osborne lowers benefit cap in push for welfare savings

8 Jul 15

The maximum amount that households can claim in benefits is to be cut from £26,000 to £23,000 in London, and £20,000 in the rest of the country, from next April as part of plans to reduce welfare spending by £12bn, the chancellor announced.

Setting out how the Conservative Party manifesto pledge to find the savings would be met, George Osborne also announced a series of restrictions on tax credits and a four-year freeze on working-age benefits.

However, the overall pace of reductions has been slowed, as they will be found over four financial years from 2016/17, and not two as originally planned.

The government will also replace the minimum wage with a National Living Wage, set at £7.20 from next April, to move Britain “from a low wage, high tax, high welfare economy, to a higher wage, lower tax, lower welfare society”, Osborne said.

The Low Pay Commission will be tasked with recommending future upratings so it reaches £9 an hour by 2020, equivalent to 60% of median earnings.

However, the chancellor told MPs that the current level of welfare spending was “not sustainable” and it crowded out spending on areas such as education and infrastructure.

“[To] live within our means as a country and better protect spending on public services, we need to find at least a further £12bn of welfare savings,” he said.

The Conservatives would continue to ensure that the system protected the elderly, the vulnerable and disabled people, but provision for working-age people needed to be reduced.
“In 1980, working-age welfare accounted for 8% of all public spending. Today it is 13%,” he said.

“The original Tax Credit system cost £1.1bn in its first year. This year, that cost has reached £30bn.

“To correct that, we will legislate to freeze working-age benefits for four years. That will include Tax Credits and Local Housing Allowance. And it means earnings growth will catch up and overtake the growth in benefits.”

However, the chancellor said statutory payments like maternity pay and the disability benefits would be exempted.

Regulated rents in the social housing sector will be cut by 1% a year over the next four years in an effort to reduce the Housing Benefit bill.

“We also need to focus Tax Credits, and Universal Credit, on those on lower incomes, if we are going to keep the whole system affordable and able to support those most in need,” he added.

This will include limiting child tax credit and support for children in the government’s Universal Credit benefit reform to the first two children.

“These changes to Tax Credits are not easy but they are fair, and they return tax credit spending to the level it was in 2007/08 in real terms.

“When we came to office in 2010 this country had reached the point where a benefit that was intended to support lower income households, was instead available to nine out of ten families in this country.

“Now, our properly focused [and] reformed Tax Credit system will provide support to five out of ten families – a much more sustainable balance in our welfare system.”

CIPFA chief executive Rob Whiteman said the scale and pace of the proposed cuts remained ambitious.

“Central government will need to work across the public sector to ensure that protection for those most in need is maintained. The costs of these reductions must not simply be transferred to other public services and the third sector,” he added.

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