Cutting the cost of welfare: what next?

Cutting the cost of welfare: what next?

John Humphrys asks: where should welfare costs be cut and will attempts to reform the system risk creating more problems than they solve?

The government easily won the vote in the House of Commons this week on its plans to limit the rise in many welfare benefits to 1% a year over the next three years. But that’s not the end of the welfare story. Far from it. Ministers want to find even more savings in the years to come and plan radical reform of the system as a whole. But where, if anywhere, should the axe next fall?

There was, in fact, no need for the government to have a debate and a vote in parliament for these changes. It has the power to bring them about anyway. But it seized the chance to make a political point by forcing Labour to show its hand. This is a sure sign, if one were needed, that welfare is going to be a very big issue in the next election campaign which seems already to have begun, over two years before polling day.

Up to now welfare benefits have tended to rise with inflation so keeping their real value roughly constant. What the government has sought to do for the first time is to limit the rise in a large number of benefits (those related to people of working age, but not pensioners) to 1% a year for the next three years. That’s below what inflation is likely to be, meaning a cut in their real value. This comes on top of another cap imposed on benefits, to limit the total amount any one household can receive in benefits each year.

The government’s justification for this move is essentially twofold. First, it says that it needs to save money. The overall strategy of reducing the government’s deficit is not going to be achieved in the lifetime of this parliament. Lower than expected economic growth means that the austerity squeeze in government spending is going to carry on pretty much right to the end of the decade. Since the welfare budget accounts for around 30% of all government spending it’s inevitable that cuts have to be found within it if the target is to be reached.

Their second argument is one of fairness. Ministers point out that most people in work have taken a real pay cut in recent years, accepting pay increases often far below the rate of inflation. Those on benefits, however, have not faced similar cuts in their real income. The proposed limit in the rise in working age benefits puts right this injustice, they say.

But Tory ministers in particular have seen the chance to make political capital out of this change. If they could tempt Labour to vote against the limit, then they might be able to portray their political opponents as being on the side of “shirkers” not “strivers”. The chancellor, George Osborne, made much of this distinction in a party conference speech when he referred to hard-working shift workers getting up in the middle of the night being resentful of those who could stay in bed with their curtains drawn because they were paid to stay at home on benefit. Labour itself has acknowledged that such a message does resonate on the doorsteps. So when the Labour leader, Ed Miliband, decided the party would indeed vote against the limit, it wasn’t surprising that the Tory party chairman, Grant Shapps, put out an advertisement in some marginal seats in effect claiming that Labour was on the side of the shirkers.

Labour says it’s wholly misleading to imply that the limit in the benefit rise will affect only the unemployed. In fact, by far the largest group to be affected are those in work who also get benefits of one kind or another. In total, about 9.5 million households (or around half the working age households in Britain) will find their real incomes fall as a result of the change and of these households around 7 million include someone who is working. Labour’s reason for opposing the limit is that it will hit some of the poorest people in Britain, those both in and out of work. The government’s own figures show that single parents in particular are expected to lose about 2% of their net income as are the poorest 10% of the population.

Four LibDem MPs joined Labour in voting against the limit and LibDem cabinet ministers distanced themselves from talk of “shirkers”. David Miliband, the former Labour leadership contender, called the government’s approach “rancid”.

The government expects to save £505m in the first year of the limit, a figure that rises to £2.3bn in 2015/16. What strikes many people, though, is that if any further savings in the welfare budget are sought they will have to be found in the benefits paid to those spared in the current cuts, namely pensioners.

Pensioners account for around 60% of the welfare budget. Much of this, of course, comes in the form of old-age pensions but a lot is spent on extra benefits given universally to pensioners irrespective of their income. These include the winter fuel allowance, costing £2.1bn a year, free bus passes (about £1bn) and free TV licences (£600m). David Cameron pledged in his manifesto at the last election that these benefits would be protected but Iain Duncan Smith, the work and pensions secretary, hinted to me in an interview on Tuesday that this pledge might not be renewed in the next manifesto. It has been estimated that means-testing the winter fuel allowance could save £1.5bn.

(What Mr Duncan Smith does have in his sights is the £13m the government spends paying the winter fuel allowance to around 75,000 British pensioners living abroad, mostly in Spain. The European Court of Justice ruled recently that the government could not stop paying the allowance just because the recipients were no longer resident in this country, but the government is reported to want to try to get round this by introducing a temperature test, hardly surprising since the point of the allowance is to help keep people warm.)

While all these specific changes to benefit levels are being implemented a much larger reform is underway. Everyone agrees that the benefit system has become incomprehensibly complex and containing all sorts of perverse incentives which help to deter people from seeking work. Mr Duncan Smith wants to change this by introducing what’s called a single Universal Benefit.

The plan is to replace six existing benefits (job seeker’s allowance, housing benefit, child tax credit, working tax credit, income support and income-related support allowance) with a single universal benefit and by so doing getting rid of many of these disincentives. Most people agree that, in principle, this is a good thing if for no other reason than simplicity is preferable to complexity. The trouble is, though, that one complexity may be replaced by another, in this case, the extreme complexity of the computer system needed to make it work. Governments have encountered terrible trouble with major new IT systems and there are already reports that the system being set up to implement the universal benefit will be no exception.

So welfare looks set to be a big political issue over the next couple of years and not just for the usual reasons. The row is likely to be not just about what should be paid to whom but whether attempts to reform the system as a whole risk creating more problems than they solve.

What’s your view?

  • Do you support or not the government’s limit on the rise in working age benefits?
  • Do you think the Tories are too tough on benefit recipients and Labour too soft or not?
  • Do you think using the language of shirkers versus strivers is justified?
  • Do you think it is right that pensioners should have been spared having a limit imposed on the rise in their benefits?
  • Do you think pensioners should go one receiving universal benefits such as the winter fuel allowance, free bus passes and free TV licences, or should these be means-tested?
  • Is the universal benefit a good idea? And if you were asked to propose a saving in the welfare budget, what would it be?

Let us know what you think.

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