The budget timebomb threatening the very poorest

By Richard Exell

There is not much about social security and tax credits in today’s Budget Report – apart from a threat of much worse to come in one of the appendixes. 


The most significant change has been on Child Benefit. The government is still going ahead with plans to levy extra income tax to take Child Benefit away from families that pay the higher rate; but instead of removing 100 per cent of the benefit once a taxpayer crosses the higher rate threshold they now plan to ‘taper’ it away for taxpayers with an income over £50,000. This is not an insignificant change, and the cost of the concession will peak at £390 million in 2013-14. It’s encouraging that the Chancellor felt he had to show he was responding to the widespread support for CB as a universal benefit; but the much more damaging policy of freezing Child Benefit till 2013 – 14 stays in place.

Compared with the previous two Budgets and the spending review, however, benefits and tax credits got off quite likely. In the Spending Review, for instance, welfare accounted for £18 billion of the £81 billion cuts.

But there was a menacing throwaway remark that should have sent a shiver up the backs of everyone who cares about poverty and inequality. Early in his speech the Chancellor announced:

But even with the Act, the welfare budget is set to rise to consume one third of all public spending.

If nothing is done to curb welfare bills further, then the full weight of the spending restraint will fall on departmental budgets.

The next Spending Review will have to confront this.

So I am today publishing analysis that shows that if in the next Spending Review we maintain the same rate of reductions in departmental spending as we have done in this review, we would need to make savings in welfare of £10 billion by 2016.

When you look for this analysis in the Budget Report, it isn’t immediately obvious where it is. It’s in Annex A, under the innocuous heading of “Trade-offs between AME and DEL”. The 2010 Spending Review runs out after 2014-15, and this Annex looks at spending in the following two years – further cuts in “annually managed expenditure” are going to be needed, of £6.6 billion in 2015-16, rising to £10.5 billion in 2016-17. The Annex makes it plain that benefits and tax credits are the biggest component of annually managed expenditure and that most other components “are either non-discretionary … or are self-financing.”

So brace yourself for another round of spending cuts, right at the time when the economy is supposed to be recovering. Think of what the cuts we’ve already had mean, the thousands of pounds some low-paid working families will lose next month, the cuts to disabled children’s benefits and to Employment and Support Allowance. We don’t yet know what the next round of benefit cuts will look like, but no-one can say we haven’t been warned that we face a second round that will leave social security in an even worse state.

Update at 6.16 pm: on first reading the Budget Report, I missed paragraph 1.38, which looks almost as significant as the £10 billion of cuts. This says “there will be a cap on the additional costs of Universal Credit up to £2.5 billion a year in the next spending review.”

This must mean one of two things:

  • If it looks as though the cost of the Universal Credit is going to break the cap there will have to be changes to the rates or to the design; or
  • UC will operate like a giant Social Fund, and when the money runs out people won’t be able to make a claim.

Either way this small paragraph could mean the destruction of Iain Duncan Smith’s dream. The UC, designed to provide a consistent guarantee that work always pays will no longer be able to do so. What will happen if more and more workers find themselves stuck on low-paying jobs? Or if unemployment rises? Or it becomes harder for disabled people or lone parents to get work?

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