How will we pay for the welfare state? (I)

15 February 2017

This article was first published in Reform’s 2017 Annual Conference brochure. To read more articles, click here.

More than £1 in every £4 that government spends goes on social security benefits. In 2016-17 this equated to almost £212 billion, or around 11 per cent of Gross Domestic Product. By comparison, the other key planks of the welfare state combined, the NHS and education system, will spend just 85 per cent of that. With an ageing population, increasing disability prevalence, persistent low pay and an uncertain fiscal outlook, pressures on social security are high.

The 2010 Parliament saw an endless stream of demands for cuts to working-age expenditure. As a result, the benefit bill for working-age people and children is forecast to be £94.4 billion this year, £2.6 billion lower than in 2009-10. During the same period, pensioner expenditure increased by £13.5 billion, to £117.4 billion in total. This reflects not only the protected status of pensioners, but also the difference in approach to uprating their benefits. Whilst pensions are enjoying a generous triple lock (the cumulative cost of which will pass £20 billion by 2017-18), working-age people are getting progressively poorer each year due to a benefits freeze.

The intergenerational unfairness of this approach is starker still when considering that pensioners are now least likely to be in income poverty. Increasing the state pension age is key to ensuring a sustainable pension system, but so too is scrapping the unaffordable and unnecessary triple lock. Encouragingly, the new Chancellor has indicated he may be open to this.

Tax Credits, Housing Benefit, and Employment and Support Allowance (ESA) together account for almost two thirds of working-age expenditure. As (predominantly) income-related benefits, they support people struggling to make ends meet, the “just managing” identified by the Prime Minister.

In each of these areas, benefit payments are picking up the pieces of failed policy elsewhere. Reducing Tax Credit spend means supporting people to earn more. Reducing the cost of Housing Benefit means addressing the shortage of affordable, social and low-rent homes. Spending less on ESA means helping more disabled people move into work – though as Reform has highlighted, it also means reforming the benefits system.

It is in delivering these reforms that the Government’s domestic legacy should lie.

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