Deeper benefit cuts needed to hit Conservative target

Osborne will have to do more if he wants to reach targets for social security spending. Philip Toscano/PA Wire

A Green Budget for 2015 was released recently by the Institute for Fiscal Studies. The detailed report on social security spending shows that a future government would have to implement much deeper cuts than have so far been suggested to find the £12 billion reduction in spending sought by the Conservatives.

Between 2010–11 and 2015–16, the coalition government has implemented a deficit reduction package of £115 billion, of which £17 billion has come from cuts to social security benefits and tax credits. Despite these efforts, the structural deficit is still forecast to be 3.6% of national income in 2015–16.

Different political parties have different views about how much further fiscal tightening is desirable in the next parliament. But all three main UK parties would require some further tax rises or spending cuts in order to meet their stated targets for borrowing.

Not hitting the target so far

Given that spending on social security benefits and tax credits will make up around 30% of total government spending in 2015–16, it is likely that any government taking office after the general election later this year will consider making further cuts to social security spending.

Indeed, the Conservatives have said that they would wish to cut £12 billion from the social security budget, if they were to form a majority government after the election. Their most significant proposal so far is a cash freeze on all non-disability benefits for those of working age. This would span the first two years of the next parliament: 2016–17 and 2017–18.

We estimate this would reduce spending by £2.4 billion a year. This is significantly less than the £3.2 billion reduction estimated by HM Treasury when the policy was announced, as inflation forecasts are now lower (and so the real cut to spending is smaller).

What are the options?

How might a government go about reducing spending by the full £12 billion a year? To get an idea of the scale of cuts required, consider this: freezing all benefits and tax credits except for state pensions for the entirety of the next parliament would cut spending by a little more than this amount. This would involve taking an average of £800 a year from 16m families.

If pensioners were entirely protected, it would not be possible to cut spending by £12 billion in the next parliament through cash freezes alone. Extending the Conservatives’ proposed freeze on non-disability benefits for those of working age to cover the whole five years of the next parliament would cut spending by only £6.9 billion. Even if disability benefits were included, the estimated cut in spending would be less than £10 billion.

Instead, additional spending cuts would have to be found in other areas, such as support for families with children, or housing benefits.

More radical options for reform include making all housing benefit recipients pay at least 10% of their rent (reducing spending by £2.5 billion), or abolishing child benefit and increasing universal credit to compensate low-income families (£4.8 billion). The future government could also reduce the generosity of means-tested support for children to its 2003–04 level (saving £5.1 billion), or restrict benefits for families with children to the first two children (saving around £4 billion a year, in the long run).

Current proposals won’t go the distance

In contrast with these significant changes to the support available to low-income families, the other proposals so far put forward by the Conservative and Labour parties would have relatively little impact on spending.

The Conservative proposals to remove housing benefit from those aged 18 to 21 receiving jobseekers’ allowance and to reduce the household benefit cap from £26,000 to £23,000 a year, would cut spending by £120m and £150m a year respectively.

The Labour proposals to restrict the cash increase in child benefit in April 2016 to 1%, and to remove the winter fuel payment from pensioners paying income tax at the higher or additional rate, would cut spending by £30m and £150m a year respectively.

All four policies together would reduce annual social security spending by less than £500m – or less than 0.3%.

Trade-offs are inevitable

Whether the reforms being considered are big or small, it is important to bear in mind the trade-offs inherent in the design of social security systems. For example, cuts in the generosity of housing benefit, or benefits for families with children, could increase the extent to which those on benefits face the same incentives and costs as those in work when deciding where to live or how many children to have.

But they could also leave some vulnerable groups with no means of support or introduce new perverse incentives into the system. For example, if the housing benefit were withdrawn from most young people, but an exemption were given for those who had children, this would strengthen the incentive for young people to have a child.

These trade-offs are an inevitable part of designing a social security system. But a government with a clear objective in mind can ameliorate them, by ensuring that the system as a whole is coherently designed, giving the level of support desired in the most efficient way.