State of the Nation: welfare shifts towards the working poor

No laughing matter. Workers with benefits. Gordon McKinlay

Welcome to our State of the Nation series, which looks at the coalition government’s progress over the past five years, across a range of vital policy areas. Paul Gregg looks at Britain’s biggest political footballs: the welfare state.

For the past five years, Britain’s welfare state has been undergoing a sustained and profound change. Consider that all the major benefits for the working age population and children are being merged into a single system called Universal Credit which will aim to use monthly wage feeds from employers to make timely and accurate payments to nine million families.

While this is a major shift in the structure of benefits, it isn’t the transformation I’m talking about. That is the steady and sustained switch of welfare away from supporting jobless people and families toward supporting incomes of those in work – the working poor.

Welfare spending came in at £251bn in 2013-14, which is about 37% of total public spending of £686bn (before accounting adjustments). Around half of this goes toward the elderly, the bulk of which is the state pension. This proportion is rising steadily because of the ageing population and the generous treatment of the state pension by the government. Many people, and especially pensioners, don’t think of this as welfare; they paid in to the system when working in order to get support in their retirement.

The rise of in-work welfare support

The real welfare revolution over the past 20 years has been the growth of support for working families. The tax credit system expanded greatly under Labour to support low income working families. More recently the fall in real wages has meant that this part of the welfare safety net has expanded again. Combined with this has been the increase in housing support for working families who rent. This reflects the expansion of private renting (and decline of owner occupation among the young) while rents rise a little faster than wages and has all meant a sharp increase in payments of housing benefit to those in work.

With child benefit, that now means that around half of the non-pensioner welfare bill is designed to address working poverty. The Institute for Fiscal Studies breaks down the numbers for us on welfare spending as a share of total spending and the split between pensioners and working age. Poverty alleviation charity Elizabeth Finn Care has usefully detailed the in-work and out-of-work split as it seeks to challenge persistent myths around benefits.

The story then is that the image of welfare being about those out of work, as you may have seen on TV, is rapidly becoming dated. Unemployment has been strongly cyclical with large increases in the 1980s and 1990s recessions and a far more modest one in the recent financial crisis.

www.tradingeconomics.com, Office for National Statistics

Out of work benefit receipt

Levels of unemployment benefit receipt remain higher than pre-crash but in part this reflects changes in lone parent benefits which have migrated many lone parents onto unemployment benefits. From 2008 to 2012 the age of youngest child that meant a lone parent was not treated as a regular unemployed claimant (or less commonly as disabled) was lowered from age 16 to five.

Claims for lone parent benefits rose through the 1980s as a result of higher separation among couples but also due to falls in employment rates among lone mothers (largely reflecting having younger children). By the early 1990s the employment rate of lone mothers was under 40%. It has now reached 62% and actually rose through the recent recession, a staggering change in just 20 years. This change in status of many lone parents now counting as unemployed should be considered together when making comparisons overtime. The chart below thus shows that the proportion of the population on one of these two benefits is now at levels akin to 1981, just as unemployment was starting to rise rapidly in the 1980’s recession. It is already below our own pre-recession levels. So reliance on out of work benefits for reasons of unemployment and lone parenthood is at its lowest level for 35 years.

Note: ‘Working-age’ covers men aged 16-64 and women aged 16-59. Gregg (2009) & ONS, Labour Market Statistics, YBTF, Author provided

The reason overall benefit claims still stand at four million is that disability benefit receipt rose steadily through the 1980s and 90s and has only fallen fractionally since. In the 1980s the rise in part reflected declining employment opportunities for men aged over 50 in the depressed coal mining areas and northern cities. But this group has long since retired.

Disability claims are now less focused on the over-50s and the reason for claiming has shifted toward mental health related issues like depression or anxiety. There have been efforts to reduce disability claims by tightening the testing procedures, limiting access to Employment and Support Allowance (ESA) through a contributions-led system rather than assessed need, and efforts to support those with less severe problems back into work. But these have all proven insufficient to reduce claimant numbers. This is increasingly the major policy challenge to be faced to further reduce welfare reliance in the UK.

Children in jobless households

Despite this poorer picture for disability claims, the central message is the reliance on out of work benefits is at its lowest since 1982 as a proportion of the working age population. This long-term trend decline in reliance on out of work benefits has occurred despite the fact that since 2002 the employment rate in the working age population has been broadly stable, hovering around 73% apart from a small blip around the financial crisis. So the UK has combined a good jobs record, given the severity of the crash, with the available employment working harder to reduce welfare reliance than was previously the case. This has been especially marked for families with children.

In 1996, just under one in five children lived in a workless household, way more that would be expected if available work was equally likely to be held by parents and other workers. This partly reflected very low employment of lone parents mentioned above but even among couples some one in eight couples with children were workless families, way more than in other developed countries. This has now fallen to 12.5% despite a steady increase in the proportion of children living with a single parent. There are almost no workless couples with children now were no adult is disabled.

This long-term decline in out-of-work welfare reliance, especially for families with children, and the associated reduction in child poverty where the family is workless, reflects a policy drive to require and support active job search (making welfare conditional), improved incentives to work (for example, tax credits) and help with childcare costs. This has been a shared agenda between both the previous and the out-going government.

Happy days. Cameron and Clegg at the dawn of the coalition. Number 10, CC BY-NC-ND

A more controversial area has been the explosion in the use of welfare sanctions under the coalition government. This has been linked to the rise in the use of emergency food banks by the Trussel Trust, which operates many of them. However, its part in the improvements in welfare reliance is not clear.

The challenge ahead

With employment still rising rapidly, welfare challenges over the next parliament will be twofold. First, as noted above, the numbers claiming disability benefits have started to rise again and the re-testing regime and welfare to work services under the the coalition government’s Work Programme have clearly failed here. A new strategy to engage employers more when staff become longer term sick and to re-think the return to work is clearly needed. However, if the welfare bill is to be cut in order to fund pensions then it is the in-work financial support system where savings will have to be made.

This means that either there will be major cuts to the levels of financial support to low income working families, deepening working poverty, or the earnings of this group need to rise above those of other workers. This means in practice tackling low wages, tackling the low hours of work among some groups – especially increasing second earners among this group – and trying to keep rent increases below wage growth. Falling unemployment should help keep wages above inflation for the next few years, but there remains a concern over underlying real wage increases. All this means that whoever holds the keys to Number 10 some time in early May, they will find that the welfare challenge lies as much in the labour market and in housing as it lies in the welfare system itself.