Observations

Substantial cuts made, but biggest changes to the benefit system yet to come

Date: 28 January 2015
Authors:
Publisher: Institute for Fiscal Studies

The coalition government has implemented changes to the benefit system that mean spending in 2015–16 will be £16.7 billion (7%) lower than it would otherwise have been. Real terms benefit spending, however, is forecast to be almost exactly the same in 2015–16 as it was in 2010–11, at £220 billion. This reflects the effect of underlying economic and demographic factors which are pushing up spending – most importantly an ageing population, but also weak wage growth and rising private rents. At the same time, the government has set out on a path towards radical reform of some parts of the system. But most of the major structural changes, such as universal credit, have run into problems, and are yet to be delivered. These are among the findings of a new Election Briefing Note on the coalition’s reforms to the benefit system, part of a programme of work at the IFS in the run up to the election, funded by the Nuffield Foundation.

Of course there have been some controversial benefit cuts. Cuts to housing benefit for social housing tenants (variously dubbed ‘the removal of the spare room subsidy’, or ‘the bedroom tax’), and the household benefits cap (which limits payments for most non-working families to £26,000 a year) have been particularly prominent in the public debate. Perhaps this is because they hit relatively small groups of people relatively hard – just 27,000 families are actually subject to the welfare cap, but each loses £70 a week on average. But the amounts saved from these changes (£650 million) are small in the context of the overall cuts (£16.7 billion). Proposals for a further cut in the household benefits cap to £23,000 a year – highlighted again this week - would likewise only reduce benefit spending by a further £150 million.

In fact, the biggest cuts have come from seemingly less controversial broad-based changes to benefits that affect large numbers of working-age claimants. Over half of the cuts (£9 billion worth) have come from changes in how benefits are increased each year. Increasing benefits in line with CPI rather than (the now discredited) RPI (or Rossi) since April 2011 will save £4.3 billion in 2015–16. Cash freezes to child benefit and parts of working tax credit, and the 1% increases in most working age benefits for three years, are forecast to save a further £4.7 billion in 2015–16.

There have also been other big cuts to tax credits (£3.9 billion), and child benefit; withdrawing the latter from families where someone has a taxable income over £50,000 has reduced spending by £1.9 billion. Cuts to private sector housing benefit (£1.8 billion) are also substantially larger than those affecting social sector tenants even though a majority (60%) of housing benefit expenditure goes to social housing tenants.

But despite these cuts, the reforms implemented so far largely represent an evolution of the system, rather than the revolution that was promised. All the main benefits are still in place. And although most benefits are less generous than in 2010 (also shown in recent work by CASE), the cuts only partially reverse the increases in benefits and tax credits for low- and middle-income families with children and pensioners under Labour: such families remain better off compared with an ‘unreformed’ 1997 tax and benefit system (although the same is not true for low-income working age adults without children who did not gain under Labour’s benefit reforms, and have faced subsequent cuts) – see Figure 3.5 in our recent Briefing Note on the distributional impact of tax and benefit reforms.

So what of the revolution? The introduction of universal credit - the replacement of a raft of means-tested benefits and tax credits with a new universal credit (UC) – is years behind schedule. By now, all new claims were meant to be for UC and the transfer of existing benefit claimants to UC was meant to be well under way. Instead, problems with project management and IT systems mean it is available to only some new claimants in a few parts of the country. Wider roll out is expected in the near future, but UC will still not be fully rolled out in April 2020. Implementing the coalition government’s flagship welfare reform will therefore fall largely to the next government and the government after that (if they choose to stick with it).

Changes to the disability benefit system have also been rolled out much more slowly than planned. In particular the new more stringent tests for employment and support allowance (ESA) to people already claiming support, and the replacement of disability living allowance with “personal independence payments” (PIPs), have run into problems. And fewer claimants have been found ineligible than originally expected – in part, because of successful appeals against initial decisions. Such issues and delays mean these reforms are saving much less money than hoped by now – in the case of PIPs, £1 billion less.

Beyond rolling out UC and PIP, the stage is also set for further change.

The link between housing benefit and current rents in the private sector has largely been broken. Instead the amount that can be claimed now depends, in part, on historic levels of local rents, meaning geographical relativities in housing benefit payments in 2050, for instance, will depend upon geographical differences in rent levels in 2012. This does not seem sensible and further reform looks warranted.

Child benefit, in one of the most radical structural changes, is no longer a universal benefit. But the current way in which it is withdrawn from families where the highest income individual has a taxable income over £50,000 leaves it in a strange sort of limbo, and out of step with the rest of the family-level earnings tests used elsewhere in the benefits system. That will surely require further attention.

The next government would also do well to think clearly about how benefits should be indexed over time. Moving away from the flawed RPI was sensible. But there have been various ad hoc and temporary deviations from standard indexation. For instance, most working age benefits have been subject to something close to a ’reverse double lock’. That is the government has justified below inflation increases on the grounds that earnings have been rising less quickly than prices. To continue on that route would mean that working age benefits rise less quickly than both earnings and prices over time – which does not seem a sustainable long term policy.

In contrast, in addition to having been largely protected from the cuts, pensioners have benefited from the ‘triple lock’ – the basic state pension now goes up by the highest of inflation, average earnings growth or 2.5%. When compared to the plans inherited from Labour to index to earnings from April 2012 onwards, this will increase spending on the state pension by £4.6 billion in 2015–16. This reflects the weakness of earnings growth. But perhaps it is unlikely that any government would have shifted to earnings indexation with earnings so weak. Compared to indexing to CPI inflation (now the default for most other benefits), the triple lock will cost a more modest £1.1 billion in 2015–16. Even so, the ‘triple lock’ could be very costly in the long-term as the state pension will go up more quickly than both prices and earnings, which again may not be sustainable.

Looking ahead, the next government faces the difficult decision of whether, and if so how, to make further cuts to benefits as part of continuing efforts to reduce the budget deficit. Identifying further cuts will be a challenge – especially if pensioners are again largely protected.