Newspaper Articles

Both parties need to come clean on cuts

Date: 25 March 2015
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Publisher: Times Newspapers Limited

There weren’t too many new policies in this week’s budget but it still set some almighty challenges for the next government, whichever party finds itself in charge.

George Osborne may have gone back on his plan to keep public spending falling for all of the next five years but he remains wedded to some serious spending cuts in the first years of the next parliament.

Labour aren’t without their own problems. Ed Balls, the shadow chancellor, has set himself less stretching targets on the public finances that might allow him to avoid any further spending cuts. Though that depends rather on when he wants to reach his target or the current budget balance. His preferred form of words — “as soon as possible in the next parliament” — allows considerable flexibility (or uncertainty, depending on your point of view).

In fact both major parties are leaving us with a lot of uncertainty as polling day approaches. Neither Mr Osborne nor Mr Balls has been very clear about what sort of tough choices they might make. Both have been keen to reassure us about what they won’t cut but rather less keen to spell out what they will.

One partial exception to that has been Mr Osborne’s insistence that he will be able to spare the public services because he will wield his axe on “welfare”. He wants to find £12 billion in cuts by 2017-18.

Given that three pounds in every ten spent by the government goes on social security benefits and tax credits, any government is bound to look at this area. Protecting it inevitably increases pressures elsewhere. Arithmetically, Mr Osborne’s ambition makes some sense but unfortunately it doesn’t go anywhere specific. He has done little to spell out how he will make these £12 billion of savings — though he has said it won’t come from pensioner benefits, which account for more than half of the welfare bill. The implied percentage cut for the rest of welfare spending is large.

We are actually spending as much on benefits now as we were in 2010. That is partly because there are more pensioners, the recently retired of whom are entitled to higher levels of benefits than their predecessors. Spending on pensioner benefits has risen by about 6 per cent while spending on non-pensioner benefits has fallen by a similar amount.

Even among those of working age, savings have been less than hoped for, not least because earnings have been falling and rents have been rising, putting added pressures on the housing benefit budget, among others. It also proved harder than the government had hoped to reduce spending on disability benefits.

So how might a future chancellor implement £12 billion of cuts by 2017? Unfortunately for Mr Osborne he is not going to be able to repeat his trick of relying on raising benefits less quickly than inflation. That’s what has saved him most of the money over this parliament. Headline-grabbing policies like the much reviled “bedroom tax” and household benefit cap have saved only tiny amounts by comparison.

The reason he can’t easily repeat the trick is that inflation is now so low. He does have plan to freeze a lot of working-age benefits for the next two years but that will contribute only around a tenth of the savings required. Plans to reduce the benefit cap and remove housing benefit from some under-21s saves even less. Even such radical options as abolishing child benefit, and only compensating those on low incomes, saves just £5 billion. He could save a similar amount by returning the generosity of child tax credits to their level of around a decade ago. That would, though, succeed in increasing child poverty.

The only other big sources of potential savings are housing benefit and disability benefits.

The housing benefit bill has risen remorselessly as rents have risen and more people are renting. Cuts in its generosity have only served to slow the rising cost. Further cuts would probably have to sever completely the link between benefit paid and actual rent level and would surely have to affect social tenants as well as private renters.

None of this is to suggest that savings aren’t possible. They do though need to be planned carefully as part of a clear strategy. Under the last Labour government increases in benefit generosity, and therefore long term cost, were unveiled willy-nilly budget after budget. This government has introduced too many small cost-cutting measures which don’t look like elements of a longer term plan.

A bill as big as that of social security needs close scrutiny by whoever wins the election in May. The Labour party should not ignore that fact. But the Conservatives should not be in any doubt that cutting as much as £12 billion from that bill within three years will be difficult, and will inevitably hurt poorer families. Perhaps that’s why we’ve heard a lot in the way of rhetoric and rather less in the way of concrete proposals from either side.