NAO flags up weaknesses in management of welfare cap

27 Apr 16

Auditors have called for improvements to how government manages the welfare cap after finding that failure to account correctly for the impact of tax credit cuts led to errors in last summer’s Budget.

Examining the implementation of the government’s welfare cap, which is intended to limit welfare spending to £115.2bn from this year, the National Audit Office said it is leading to greater understanding of spending across government.

However, today’s report stressed that processes for managing the cap needed to be reliable, and noted that failure to account for the impact of tax credit reforms at the 2015 Summer Budget led to forecasting errors.

Cuts to tax credits and Universal Credit spending, announced by chancellor George Osborne in the summer Budget, was initially scored by the Office for Budget Responsibility to save £4.4bn from this year.

However, when Osborne then scrapped the proposed tax credit cuts in the Autumn Statement following a political row, the OBR published revised figures, which showed the estimated costs of reversing the tax credit (but not Universal Credit) measures were in fact £3.4bn in 2016-17.

As a result, the OBR has announced the cap would be breached, with spending on areas covered by the cap (which includes tax credits, Child Benefit, Incapacity Benefit but not Jobseeker’s Allowance) set to be £119.8bn this year.

At Budget 2016, the OBR reported that it had identified further errors in the revised figures.

Today’s Managing the welfare cap report said this “exposed weaknesses” in the way sensitive policy changes are costed.

“In the Summer Budget 2015 the government made errors in its calculation of the savings from its proposed tax credit measures and a further error occurred when the tax credit measures were reversed in the Autumn Statement 2015,” the report stated.

“The OBR outlined the source of the Summer Budget 2015 errors as mostly due to a tight timescale combined with a large number of policy measures late in the process. It attributed the Autumn Statement 2015 errors to a restriction of knowledge about sensitive policy changes.”

The NAO therefore recommended that government consider the interactions between benefits more systematically, while the Treasury should better support the OBR by increasing access to departmental experts and increasing the time it has to consider the impact of new policies.

The Treasury should also set out clearer cross-departmental arrangements as plans for benefit spending at one department often affect spending in another department.

Auditor general Amyas Morse urged all departments involved in forecasting spending – the Treasury, the Department for Work and Pensions and Revenue and Customs – to quickly to improve their processes.

“Forecasts will always be uncertain but when spending is projected to be close to or over the cap, weaknesses in forecasts may affect policy or operational decisions,” he added.

The review also highlighted that, because the £98.4bn spent on Jobseeker’s Allowance is not included in the welfare cap, this could create an incentive for government to keep claimants on the out-of-work benefit.

The decision to exclude JSA was intended to reduce the level of economic uncertainty around unemployment assumptions in forecasts.

According to the NAO, however, there is a risk the current scope of the cap could have unintended consequences as moving people into work would increase entitlement to benefits such as tax credits that are currently within the scope of the cap.

Responding to the report, a government spokeswoman said ministers wanted to deliver “a new settlement for the British people” that will create a higher wage, lower tax and lower welfare economy.

“That’s why we’ve introduced the new national living wage and cut taxes for hard working families to ensure work always pays, and put in place a Welfare Cap to bring the welfare budget under control,” ahe added.

“Today’s report from the National Audit Office provides a vote of confidence in the Welfare Cap, which is encouraging greater oversight and understanding of welfare spending. It makes a number of valuable recommendations which the government will consider in order to further strengthen management of the cap.”

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