Seismic shifts in the welfare state

The report argues that the Queen’s Speech must lay out plans to cut the cost of pensions and tax credits and begin a debate on the future of NHS funding.This would help safeguard these programmes and help to meet the deficit challenge.

Politicians are running scared of the elderly voting bloc. In the 2010 election 76 per cent of eligible people aged 65 and older voted; well above the turnout for the population as a whole of 65 per cent. The fast growth in the number of people aged over 65 means that in the 2015 election 1 in 4 voters will be 65 or older. This will increase in every successive election to 1 in 3 by 2050.

The same changes that make reform politically difficult also make it necessary. These demographic trends also mean transfers to retired families (net of the taxes they pay) are growing in real terms. Office for National Statistics data show that in 1990 the average retired family made an annual net gain of £5,422 from the welfare state. Twenty years later, that gain had risen to £10,009, adjusted for inflation. This is happening just as the share of the population that is working aged and can pay the taxes required to fund them is falling. The UK’s welfare state is turning on its head.

New Labour and the Coalition Government identified the need to put the state pension on a more affordable footing. But they have not done enough to reduce future costs. The proposed single-tier pension will not reduce spending until the 2040s. The savings from bringing forward the retirement age have been undermined by increasing the generosity of the state pension over time. Poor value for money benefits like the Winter Fuel Allowance, free TV Licences and bus passes remain outside the value for money agenda.

For working aged households, welfare spending should shrink when the economy grows and vice versa. Yet over the last decade this link has been broken. Between 2005 and 2010, the average family received an additional £347 in benefits in real terms. Of this increase, the biggest increase, of £175, was due to higher tax credits. The result is that many costs will continue to rise even when growth improves. Growth will not solve the Chancellor’s welfare spending problem. This higher welfare spending has also done little for families themselves – as their higher benefits have come with higher tax bills. They have been caught in a wasteful money-go-round funded by their own taxes.

The introduction of a cap on Annually Managed Expenditure (AME) should help manage these costs. While departmental expenditure has shrunk by 8 per cent over the past three years, AME has grown by 25 per cent. The Coalition must avoid the temptation to exclude pensioner benefits from an AME cap. Excluding these benefits would exclude a third of all AME and mean it is simply not credible, particularly when other large areas of AME (such as debt interest) would also need to be outside the cap.

The NHS has remained protected from departmental cuts. This is the largest area of departmental spending and accounts for a growing share of the public services that families consume. For pensioner households, spending on the NHS now accounts for around 95 per cent of the major public services they consume. For decades real reform to the funding of the NHS has remained off the agenda. Emphasis has been given to reorganising the service to make the NHS more efficient. As important as this is, governments can no longer avoid hard decisions on how the NHS is paid for.

Key figures in the report are:

  • Net transfers to retired families are growing in real terms. The net gain for the average retired family has risen from £5,422 in 1990 to £10,009 in 2010.
  • In 2015, 1 in 4 voters will be 65 or older. By 2050 this will have risen to 1 in 3 voters.
  • AME accounts for close to half (48 per cent in 2013-14) of all government spending. 60 per cent of AME spending goes on social security benefits and tax credits. The majority of this spending (55 per cent) is on pensioners.
  • From 1990 to 2010, spending on the NHS rose as a proportion of the Office for National Statistics’ measure of spending on benefits in kind, from 90 to 95 per cent for retired families and from 44 per cent to 46 per cent for non-retired families.
  • The average non-retired household has been on a wasteful money-go-round. Office for National Statistics data show that as average cash benefits and benefits in kind increased (by £1,333 and £3,630 in real terms, respectively) between 1990 and 2010, their direct and indirect taxes have grown (by £1,784 and £435 in real terms, respectively).
  • Welfare spending on non-retired families is increasingly structural (not due to the “automatic stabilisers”). Between 2005 and 2010, spending on tax credits (which do not vary with the economic cycle) increased by £175 for the average family, in contrast the Job Seekers Allowance (which does vary with the cycle) only increased by £23.
  • The net contribution made by the average family has fallen since 2000. Between 1990 and 2000 the average net contribution rose from £3,321 to £3,649 (in real terms), while in the years to 2008 this fell to £1,415.