- Our Work
- The Reformer Blog
17 June 2015
The Treasury will currently be working overtime to complete the Chancellor’s Emergency Budget in time for July 8. We expect that it will, for the first time, lay out how the Government will meet its promise to take a further £12 billion out of the welfare budget. In a new paper out today, Reform argues that a more strategic approach is needed.
The welfare system plays an important role in the wellbeing of the nation. It provides a safety net for people who fall out of work, support for those who can never work, and financial aid for those on low incomes and with significant additional costs. In doing so it seeks to mitigate against poverty and enable all to reach a basic standard of living, in part by helping people move into and stay in work. However the welfare state must also be affordable and be seen as legitimate by those paying for it. Governments must reconcile these trade-offs and make decisions about what they prioritise.The Coalition years The Coalition Government prioritised legitimacy and making work pay. They reduced the working age benefit bill by an estimated £16.7 billion a year, largely from capping, freezing and changing the uprating of benefits. They sought greater fairness for those working on low incomes by cutting the amount of money an out of work household could receive in benefits and sought to make work pay through their Universal Credit (UC) reforms.
However, whilst the Coalition Government’s savings were sizeable, as the Institute for Fiscal Studies has pointed out in reality they merely stemmed the expected rise in spending. To take a further £12 billion from the welfare budget by 2017-18 would require substantial further cuts. Reform does not believe it is possible to reach this scale of savings without eroding the standard of living of those on already very low incomes.Priorities for reform Instead, Reform argues that the Government should seek to make sustainable savings through principled, structural reform focused on the main drivers of working age expenditure. These are disability benefits, Housing Benefit and Tax Credits.
For many of those currently claiming sickness and disability benefits, the current system is doing more harm than good. It is well-evidenced that being in work has a strong positive impact on an individual’s health and wellbeing – and that labour detachment escalates over time. Consequently, the high number of people on these benefits, coupled with very low off-flow rates, should be of great concern to the Government.
To address this the Government should aim to remove the perverse incentives to claim Employment Support Allowance (ESA) built in to the current system. Taking the opportunity of UC, it should remove the financial incentive by reducing the Work Related Activity Group rate to that of Jobseeker’s Allowance. The level of conditionality and assessment process for ESA claimants should also be reformed to ensure that people with temporary and/or partial work capability are not left languishing on benefits.
The high number of Tax Credit claimants reflects the high proportion of low skill, low paid jobs in the UK. Tax Credits, introduced to tackle poverty and make work pay for low earners, subsidise employers paying low wages. The inadequacy of the National Minimum Wage to provide an acceptable standard of living has led to increasing calls for the introduction of a Living Wage, with many employers voluntarily paying it. Reform argues that, while we must consider the potential employment effect, the Government should encourage employers to pay higher wages for those at the bottom of the earnings scale. To this end, the Government should make addressing low pay a priority and work with businesses to achieve this.
Finally, the substantial increase in spending on Housing Benefit is largely a result of change in the way governments support low-income households, not an increase in generosity. Rather than supplying social housing, there has been a shift towards subsidising private rental accommodation. This has led to higher spend for no additional benefit and represents poor value for the taxpayer. Reform recommends the Government reverse this shift by investing in building new social housing. This requires upfront investment but would make significant savings over time. They should also reconsider their intention to extend Right to Buy to Housing Association tenants.
The approach recommended in our new report is based on a principled approach to welfare reform, not arbitrary savings targets. We await July 8 to see whether the Chancellor sticks to his £12 billion cuts.
Hannah Titley, Researcher, Reform