Osborne’s welfare cap: Why it won’t make work pay

The Chancellor, George Osborne, today announced the details of the welfare cap.

One point becomes immediately clear. He framed the cap on welfare thus: ‘never again should we allow [welfare] costs to spiral out of control and its incentives to become so distorted that it pays not to work’. But, the cap doesn’t really help with this. Much of the expenditure that is capped goes to those in work: tax credits (more than two thirds of which goes to the in-work); housing benefit (a significant proportion of which goes to households in work); and, a large part of the Child Benefit bill. It also includes statutory maternity pay and tax free childcare. Instead, it is a cap imposed as much on those in-work and those incapable of working. So, even as a rhetorical device it doesn’t work.

If it won’t achieve its stated goal, it may have other effects.

First, on the positive side, the fortunes of the pensioner population and the working age population is slightly less stark than they appeared they might be. As expected, the Chancellor left the state pension out of the welfare cap, so the triple lock on the state pension is safe. Surprisingly, though, he included Winter Fuel Payments and Pensions Credit in the cap. So, these are fair game and as vulnerable as housing benefit.

Second, it is questionable whether this is the right cap for the recovery. The Government has sought to remove from the cap benefits that are affected by the economic cycle (such as jobseekers allowance and housing benefit for the unemployed) – so-called automatic stabilisers. Ironically, the Government may have made life difficult for itself given that the economic recovery is being characterised by falling unemployment but low earnings for those in work. This is likely to mean reduced expenditure on Jobseekers Allowance but no let-up in expenditure on in-work benefits (such as tax credits and housing benefit). So, the Chancellor has left out the bits that are due to go down and put in elements that might be expected to rise if the economy continues on its current path.

Third, if the aim is to tie the hands of future governments, then it fails the test. Any future government could simply switch cash benefits to benefits in kind. So, if a government finds that welfare spending is pushing above the cap, it can simply remove a benefit (such as childcare tax relief) and reposition it as a service (free nursery places). In some cases there is a positive reason for providing a service (such as Free School Meals). But, creating a system with this engrained bias seems a strange decision for a Conservative Chancellor.

Perhaps most fundamentally, the cap is likely to create obfuscation on important policy decisions rather than forcing governments to confront them. Now we have a downward lock that lumps together a whole bunch of largely unconnected spending decisions, some affected by the state of the economy (tax credits and housing benefit), some affected by the functioning of consumer markets (housing benefit) and some by policy decisions (such as eligibility to disability benefits). As the OBR notes in its report, ‘the rising proportion of the renting population claiming housing benefit may be related to the weakness of average wage growth relative to rent inflation’. We would be better to address openly these underlying factors rather than hiding them under a cap.


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