Welfare Reform Bill

Ahead of the Autumn Budget, I thought it would be worth looking at what cuts to the Welfare Bill really mean.

1) The size of the cuts

The government has already planned cuts of £18 billion to the welfare bill, and is planning another £10 billion.  The LibDems are reported to be planning to veto this extra £10billion cut if the Conservatives do not also allow a higher tax rate for the rich.

£28 billion may or may not seem like a big sum to you.  As with all figures, it needs to be put into context.  The context most people are hearing is the size of the current welfare bill – £163 billion and 1/3 of all government expenditure.[1]  However there is more to it than that.

The first important piece of context is where does all the welfare money go?  In 2011/12, 66% of the welfare budget went to pensioners.

The second important context is where are the cuts coming from?  The answer is that they are coming from working-age adults.

Why does this matter?  It matters because cutting £28 billion from a total welfare bill of £163 billion is a cut of 17%.  But when some of the benefits are protected, the amount cut from the rest will be a much bigger percentage.

The government has confirmed that spending on DLA for children and pensioners will not be part of the 20% cut planned for DLA; pensioner’s freebies (winter fuel allowance, TV licence and bus pass) will not become means-tested; council tax cuts will not affect pensioners; and pensions will not be subject to the freeze planned for other benefits.  These benefits together total £95 billion.  That’s £95 billion from which cuts will not be made.

All other pension-aged benefits add a further £12 billion, taking the total to £107 billion; these benefits are Bereavement benefits, Christmas bonuses, Industrial injuries benefits, Social Fund, and Severe Disablement Allowance.

This leaves £54 billion, the amount of benefits spent on people of working-age.  These are the benefits that the government is cutting.  These are the people who are carrying all of the cuts.  Cuts of £28 billion from a budget of £54 billion is 52%.

DLA is not quite so bad; a 20% cut in the total DLA budget but taken only from those of working-age is a 36.5% cut in DLA for people of working-age.

The third piece of context is how does this compare to other government cuts?  I don’t understand how the budget works, so I’m not sure how to compare this properly.  What I do have is a table from the Guardian, showing the budget cuts by department as outlined in the 2010 budget.[2]  Whilst I am not sure how the 5.7% cut in the DWP budget fits with the cut to the welfare bill, these figures show that the DWP is facing the biggest cuts of all departments except for Communities and Local Government.

Different data from the Institute for Public Policy Research says that departmental budgets will be cut by 10% over the 2010 spending review.[3]  Education spending will fall by 3.5% in real terms, defence spending by 7.5% and capital spending by 27%.

I don’t know enough about how government spending works to know if these are the right comparisons to be making.  Please leave advice in the comments, or on twitter (@AidaAleksia)!DepartmentDepartmental contributions in 2010-11, £m% Reduction to Budget (Treasury calculations)Department for Education6701.2Devolved Administrations7041.3CLG spending by local government4051.5Foreign and Commonwealth Office552.5Law Officers’ Departments182.6Department for Energy and Climate Change852.7Cabinet Office793.3Ministry of Justice3253.4Home Office3673.5Department for Culture Media and Sport *883.5Business Innovation and Skills8363.9Chancellor’s Departments **4513.9Department for Transport6835.1Department for Environment Food and Rural Affairs1625.6Department for Work and Pensions5355.7Communities and Local Government7807.4TOTAL62432.6

2) The impact of the cuts

The impact is likely to be huge.  The government haven’t done an impact assessment, because they said it would be too complicated – an indication perhaps that there will be multiple, inter-linking impacts.  Impacts may include financial stress, emotional stress, strain on family relationships, increased costs for the NHS and social services and increased numbers of people in temporary accommodation.

These impacts will create more financial cost for the government and huge emotional, social and financial cost for the individuals concerned – both those who lose money and those who care for them.

At times of financial uncertainty, those who can afford to do so often save.  This in turn has a negative effect on the economy as there is less spending.  The poor, however, cannot afford to save because they need all they have for necessities.  A decrease in their income is a decrease in spending (vs a decrease in saving for the better-off); an increase in their income means an increase in consumer spending in the economy (compared to an increase in savings).  With welfare cuts taking money away from those already in poverty and deep poverty, the result will be a decrease in spending in the economy.  This is not a good strategy for any government that wants to come out of recession.

3) Why we have a benefits system

We have a benefits system because a post-war government recognised that there is value in providing healthcare and that there is a need to assist those who have an unavoidable interruption in earnings.  Benefits were to be universal, to ensure that there was no discouragement of saving.  Benefits were to be set at a rate that depended on need.

The current system does not address the reasons why there are interruptions of earning – namely, lack of jobs and lack of health.  Beveridge recognised that in a situation where the welfare bill is high, the correct response from the government is to address the issues that created this situation.  The NHS needs to be improved, with shortened waiting times, more investment in research into new treatments and more access to treatment.  Jobs need to be created.  Both of these mean short-term spending, but in the long-term are the only just way to bring down the welfare bill.

The current system relies a lot on means-testing.  Universal benefits would be much more expensive; an appropriate issue to consider is whether to raise National Insurance contributions to meet the extra expenditure.   People may be happier to pay into a system that guarantees to prote4ct them in the eventuality of an interruption of earnings, than they are to pay into a system that does not protect them.  Insurance wise, this from of social ‘insurance’ is cheaper and more efficient than private insurance against job loss, ill health or any other cause of earnings-loss.  This solution may or may not be acceptable to the public, but at the least it may be worth discussing.

Benefits are not set at the level at which they are needed.  The Joseph Rowntree Foundation concluded that pensioners (the group that takes up 2/3 of the welfare bill, and which is not seeing any cuts) are the only group to receive an adequate means-tested income from benefits.  All other groups receive only 40-60% of what they need from means-tested benefits.  For benefits to truly be a safety net they need to provide a subsistence income.

At the moment, a large amount of benefit goes on Housing Benefit.  This is wasteful.  Any money going to a private landlord is wasted from the government’s viewpoint as the money leaves the government; payments to social landlords are simply a movement of money within the government.  The government should therefore seek to increase social housing in order to be able to ‘pay’ more housing benefit to itself.

There needs to be recognition that high housing benefit means more money to the landlord, not the tenant.  There also needs to be recognition that more expensive areas may not be expensive because they are ‘nice’ but because they are close to jobs.  Moving unemployed people into areas with poor access to jobs is not going to help them to get a job, especially when commuting costs take a larger percentage of an individual’s income if that income is low.

Finally, we need a consideration of why we have child benefit.  Under Beveridge’s original system, families did not receive benefit simply for having children.  However, if there was an interruption in the family’s earnings then the size of the family was taken into account when determining how much money the family needed for a subsistence income.

This principle is being returned to in part under Universal Credit.  If a family is in need of support from the welfare system then there is a ‘child element’ that is paid depending on the number of children.  Although this won’t necessarily be enough for a subsistence income, the principle is there, and the government could choose to ensure that subsistence incomes are provided.  This is undermined by the benefits cap, but again, the possibility exists for making it work (by removing the cap).

This then leaves the question of why we continue to have Child Benefit as a separate benefit to Universal Credit that goes to everyone regardless of work status.  When the government complains that poor families are choosing to have children as a revenue source (although Child Benefit does not cover the cost of a child), why have they not used this opportunity to remove the benefit altogether?

One answer is that to only give Child Benefit when a parent is out of work would create a situation where families really can get more on benefits by having children and not working than by working and not having children.  This beloved comparison of the government relies on the assumption that the working couple would not receive benefits if they had children; in fact as the system currently is and still will be under UC, a working couple or parent can always have more income (from work plus any applicable benefits) than a non-working couple or parent with the same number of children.

The other good reason to provide benefits for children is because to have children is to invest in the future of the country.  These children will grow up to become workers, paying the taxes needed to support all of the state provisions, including health care and pensions.  Without these children, the country will struggle to support its future pensioners, struggle to look after its population.  Seen this way, children are a benefit, not a drain.  It is entirely sensible that the state assists its parents to raise its children.

A benefits system needs to be fair.  It needs to provide a subsistence income.  And a high welfare bill should be solved by removing the causes that made it high, not by refusing a subsistence income to those who have lost their earnings.

[1] Different data sources cite different figures. The DWP’s benefit expenditure table says £163 billion was spent on benefits in 2011/12.  However, the Spring Budget 2012 said ‘social protection’ expenditure was £207 billion.  Total expenditure was £689 billion in 2011/12.

[2] http://www.guardian.co.uk/news/datablog/2010/may/24/coalition-government-public-finance

[3] http://www.ippr.org/images/media/files/publication/2012/09/pressures-and-priorities_Sep2012_9633.pdf

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