Welfare cuts are not the same as welfare reform

21 March 2016

The resignation of Iain Duncan Smith is played out in part as a human drama: of Osborne v IDS, of the two sides of the Brexit debate. But it’s really about what we mean by welfare reform, fairness and tensions between different Government pledges.

The current controversy has its roots in the Conservative manifesto pledge to cut welfare bills by £12bn (which the Government can claim to be meeting) and the Government’s self-imposed £120bn cap on total welfare spending (currently breached in part because of spend on disability benefits consistently exceeding forecasts). Working age welfare (pensions are protected) spending amounts to around £110bn. So the manifesto cuts are equivalent to £1 in every £10 that each of around 9m households in receipt of working-age benefits currently receive.

Tax credits account for £30bn, so it’s no surprise that George Osborne looked there for savings. But the subsequent backlash forced a reversal of those cuts (though they are still planned to come in as Universal Credit rolls out, of which more later…). Disability benefits are £37bn and the last year has seen Parliamentary ping pong over cuts in ESA and the most recent proposed cuts in Personal Independence Payments (PIP) – in part because spending on disability-related benefits has consistently exceeded forecasts.

The bottom line is that it is not possible to make large savings from working age welfare in a relatively short period of time without taking away significant amounts of money from large numbers of people. And it turns out this isn’t popular.

This points to a fundamental truth: welfare cuts are not the same as welfare reform. The former is aimed at reducing spending by cutting rates and eligibility. The latter is about ensuring the whole welfare system is focused on increasing employment and opportunity, and in doing so reducing spending.

So here are four key questions that Stephen Crabb, the new Secretary of State, will need to answer to get welfare reform back on track.

1. Is it time to give up on Universal Credit?

Universal Credit (UC) is based on a good and simple idea: that work should always pay more than welfare by rolling together a number of key benefits. But in practice it has proven very difficult to deliver. By now around 5 million people were meant to be on UC, but only 200,000 are. And the current system does, in general, already reward work. Successive Treasury cuts to the amount of money people are allowed to keep before benefits are clawed back (the work allowance) and how quickly money is clawed back as earnings rise (the withdrawal rate) have to some extent gutted UC of its original intention. Given this, now is a good time to ask whether we have reached diminishing returns that is distracting too much attention.

2. Which pledge would you like to break, Secretary of State?

In general, it is best for a Government not to break manifesto pledges. But the self-imposed cap on total welfare spending has already been breached. So there is a growing choice between missing the cap and spending reduction targets, or crossing the Rubicon of benefits for better-off pensioners. In practice, my money would be on the former – at least until after the next election.

3. How can the Government meet its target to halve the disability employment gap?

The best way to reduce the amount of money being spent on disability benefits is to help more people into work. The gap between the employment rate of disabled and non-disabled people is a scandalous 30 percentage points. That’s why the Conservative manifesto commitment to halve this gap was so welcome. But cuts to ESA and PIP won’t help achieve this or ensure people who need support get it. The current system doesn’t provide disabled people with the support they need when they need it. A fresh start is needed and working with disability groups and experts would be a good place to start in thinking things through. The forthcoming White Paper provides an opportunity for this and for a renewed focus on delivery as much as policy.

4. How can we help people progress from low pay?

Part of the reason for lower than expected income tax receipts and high demand for tax credits is the UK’s relatively high prevalence of low pay. Here there are some genuinely interesting things starting to happen, some under UC, that mustn’t be lost no matter what happens to UC. For example, the DWP is trialling how best to support people in low pay to boost their earnings. Learning and Work Institute are doing likewise through our Ambition London project, as are a number of cities and Boroughs such as Plymouth, Glasgow and Hounslow. How can we harness this energy and innovation into a full frontal assault on in-work poverty?

It may not seem like it right now, but there’s a real chance for a fresh start for welfare reform. A chance to escape the cycle of missed targets leading to more proposed cuts leading to significant worry for large numbers of people. Real welfare reform is about increasing employment, extending opportunity and providing support for those that need it. It’s time to re-establish that founding mission.