No more welfare cuts? Unless the cap doesn’t fit.

22 March 2016

The announcement by Stephen Crabb yesterday that there are no plans for further welfare cuts is welcome.  However it is already being called into question, and it is easy to see why: because the government had no plans to cut welfare at this Budget either.  The fact that they did so owes more to their troubled record on welfare reform and to political traps laid before the election.  And unless action is taken on both of these things, this crisis may be doomed to be repeated.  To understand why, it is important to look at the three drivers of the cuts announced last week.

Reforms off-track

The first driver was the failure of the government’s disability benefit reforms.  Back in the June 2010 Budget, the government announced that it would introduce an ‘objective medical assessment and revised eligibility criteria’ in Disability Living Allowance, leading to savings of more than £1 billion a year compared to forecast spending.  However, the government had no idea how it would achieve them and spent the next three years legislating for and then piloting the new Personal Independence Payment (PIP).  The reforms have been off-track ever since, with delayed implementation, huge delays for applicants (reaching an average of forty weeks at one point) higher than expected volumes and larger than expected awards.   

Stephen Evans set out yesterday the critical distinction between welfare reform and welfare cuts – and in disability benefits, the government has failed to deliver on both.  Far from saving £1 billion a year, expenditure on disability benefits ended up £1 billion higher in 2015 than the government had originally forecast.  The Office for Budget Responsibility (OBR) set out the reasons for this here, in this month’s Economic and Fiscal Outlook.  Put simply, introducing PIP has not delivered the savings expected – with savings “more like 5%” compared with DLA.

A cap that doesn’t fit

The second key driver was the Chancellor’s decision in 2014 to introduce an overall cap on most welfare spending, including DLA and PIP.  We explained the cap in this blog, and argued that it may lead to government having to make cuts to benefits whenever their forecasts changed.  It was a political trap for Labour, but on Wednesday the Chancellor fell straight into it himself

Without the welfare cap, the Chancellor would have been under no specific pressure to make up for the savings that had failed to materialise on PIP.  This is because revisions to spending are classed as changes in forecasts – buried in the OBR’s briefings and not in the Budget documents themselves. 

The welfare cap changed things though.  Now, upward revisions to forecasts lead to breaches in the cap, which in turn require new policy changes in order to bring spending back down.  And any changes to policy need to go in the Budget ‘scorecard’. 

I suspect that the Chancellor had felt at the time that the welfare cap would act as a check on DWP and its Secretary of State – forcing them to deliver the savings promised or to look for new savings elsewhere.  Certainly, the political pressure to hit the cap played a large part in the Department consulting on and then announcing these PIP changes. 

Financing tax cuts

The final factor, though, was opportunism.  It is very hard to argue – as the former Secretary of State tried at the weekend – that the cuts to PIP were forced on the Department on the eve of the Budget.  They were a considered choice, taken by DWP, to bring PIP spending into line with original forecasts and to get closer to the cap.  They were announced and costed by the Department on 11 March, and the detail would have been modelled and agreed some weeks earlier. 

However, the savings did not need to be announced until the Autumn Statement – as that is when the OBR officially judges progress against the welfare cap.  That they were rushed out the week before Budget would have been the Chancellor’s decision alone, so that he could get them into the Budget maths.  And it backfired spectacularly – never mind that the cuts remain lower than those that Government had previously claimed, nor that they are offset by larger rises in disability benefit spending as more people receive PIP and get higher awards: in the Budget scorecard only the policy change is counted: so it looks like a further £4.4 billion of cuts to disability benefits, while business taxes and income tax for higher earners are cut. 

No more cuts?  Unless the cap doesn’t fit

Importantly, none of these drivers behind the Budget announcement came from the government’s £12 billion target.  The government has already announced how it will hit this, with the summer Budget last year and the Spending Review setting out cuts with a combined impact of £12.8billion in 2020/21. 

However what is most striking about the PIP cuts – and what should be most worrying for Stephen Crabb – is that they were never part of the longer term plan.   If the previous reforms had not been off-track, and if the welfare cap had not been breached, then there would have been no further cuts to PIP and no Budget measure on welfare. 

Looking ahead, there are far more reforms coming up that have the potential to go off course – cuts in Universal Credit, limiting of tax credits to two children, cuts in Employment and Support Allowance, the new lower benefit cap.  All of these bring new challenges.   This is why Treasury was at pains to point out yesterday that it is only committing to no more planned cuts – they will not want to let DWP off the hook, nor will they want to abandon the welfare cap. 

What seems certain, though, is that the government will finally stop looking at ways to cut benefits for disabled people specifically.  This is hugely welcome, and long overdue.  It is particularly welcome for those 640,000 claimants set to lose out from the rules changes announced last week. But it does increase the pressure on other recipients, including those beyond working age who have not been hit thus far.

How Stephen Crabb and his officials navigate these issues will be a challenge.  In my view, the Government should abandon the cap and review its reforms.  If it doesn’t, then this will not be the last Budget to cut welfare.