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Politics over policy: the PM’s welfare reform agenda

As good civil servants observing the appropriate rules, the Downing Street press office issued a copy of the prime minister’s welfare reform speech with sections marked ‘political content excised’. In truth, if they’d applied that editing principle consistently, the whole thing would have been cut. This was a speech about politics, not policy. Sometimes the prime minister appears in public naked, politically speaking, and today was one of those occasions.

The speech – ostensibly about the principles underpinning welfare reform – has its origins in last year’s autumn statement, when the chancellor admitted that he would not meet his target to eradicate the structural deficit in this parliament but would need two more years of the next (2015/16 and 2016/17) to do so. Few at the time woke up to what this really meant, since the issue was overshadowed by the fact that the economy was tipping back towards recession, so the Treasury had another go at alerting people to it in last March’s budget. This time, the budget documentation spelled out more graphically that, without further welfare spending cuts, the average real reductions in departmental spending would increase from 2.3 per cent a year in the current spending review period to 3.8 per cent a year in 2015/16 and 2016/17. In order to prevent this rise, the Treasury argued, welfare cuts of £6.6 billion and £10.5 billion would be needed in these years respectively.

At this point, a reasoned debate could be held about whether the government should stick to its new path for fiscal consolidation, or close the spending gap with tax rises rather than spending cuts, or even argue that it is daft to try to forecast government plans this far out from the next general election, particularly given the uncertainty in the eurozone. But this is politics, not academic debate. So the prime minister has decided to start framing the fiscal question as a political one about welfare cuts, and more specifically, about entitlements to benefits for working-age adults. Although dressed up as the opening salvo in a public debate about the purposes of the welfare state, his speech was in reality the staking out of a new conservative populism, one that differentiates his party sharply from its coalition partners.

As such, the first observation to make about the speech is that it renders a government spending review next year much less likely. Whitehall had been anticipating a 2013 spending review process which would set departmental budgets for 2015/16 and onwards into the middle of the next parliament. By setting out such decidedly Conservative plans for welfare cuts, the prime minister has made it almost impossible for the coalition partners to agree on how to meet the trade-off between welfare and spending cuts set out in the March budget. Although Number 10 was at pains today to say that some of the ideas floated by the prime minister could be implemented before the general election, it is inconceivable that both parties could now sign up to a fiscal plan covering the first three years of the next parliament if these ideas were to form its basis (for no other reason than that there are simply too few Blue Dog Liberal Democrats with safe seats like David Laws to support such an obviously self-defeating strategy).

Much more likely is that they agree a one-year settlement, covering 2015/16, which is the minimum they have to do before a May 2015 election. Both parties would then be free to set out their plans for the rest of the parliament in their manifestos, which is essentially what happened in the 2010 election, as no spending review had been held then either. (To speculate further, it is possible that a one-year settlement for 2015/16 could be announced in autumn 2014, allowing the Liberal Democrats to withdraw from the coalition at that point and move to a supply and confidence arrangement for a minority Conservative government; George Osborne would then have free rein to announce an unashamedly Conservative budget in 2015).

What then of the substance of Cameron’s speech? The prime minister confirmed that pensioner benefits would remain untouched, but this was a speech about class, not generational politics. The bulk of his proposals were addressed to the working-age poor: restricting housing benefit or access to social housing (he wasn’t clear which) for the under-25s; limiting child benefit payments to three children in a household; reducing benefit levels according to duration of claim, and so on. Despite his protestations to the contrary, there was nothing strategic or principled about any of this. It was a melange of populist initiatives, without any overarching strategy or argument either about the future pressures on the welfare state, and the priorities it should embody, or about the balance between the principles, such as need or contribution, underpinning it.

Hence the proposals for cuts were more symbolic than substantial. Limiting child benefit to three children saves £330 million in a budget of £190 billion; this is not entirely insignificant, given the fiscal position, but is hardly a fundamental reshaping of welfare provision. Similarly, only one in 20 of those in social housing is under the age of 25, and only 8 per cent of housing benefit expenditure goes on this age-group. Although the latter costs £1.8 billion a year, a large number of claimants will be young people with children, while others will come from high-risk groups like care-leavers and those escaping domestic violence, as the prime minister acknowledged. His ideas for cuts were chosen not because they represent a fundamental rethinking of the welfare compact but because they play well in focus groups. To register that is to state the obvious-obvious, as it were.

Hence by far and away the biggest single item for generating savings in the prime minister’s list was his proposal to uprate working-age benefits by average earnings, rather than the consumer price index (CPI), when the former is lower. This is rather like the triple-lock guarantee for the basic state pension, only in reverse. Last year, it would have meant working-age benefits were uprated by only 2.5 per cent, saving £5 billion. Over the last four years, earnings growth has been lower than CPI every year, such that the cumulative growth of the former was 8.4 per cent, against 15.2 per cent for the latter. To cash that out, JobSeeker’s Allowance would now be £66.81 per week if it had been uprated by earnings, rather than £71.00. Over time, these savings get very large (even if the relative weakness of real earnings compared to prices over a sustained period of four years is rare).

Labour’s response to all this was muted, for the reason that it didn’t much fancy walking into such a clearly signposted political trap. But that has left it largely denuded of voice, moral or otherwise, in this debate. A different approach would be to start with the need for a fundamental reshaping of the welfare state and to set out alternative plans. It could argue for a shift from housing benefit spending into bricks and mortar home building by empowering local authorities to spend the available resources through ‘affordable housing grants’, as IPPR set out last week. It could accept that young people who don’t go to university shouldn’t have access to lifetime social housing tenancies or even housing benefit, but make the case instead for a properly funded apprenticeship or FE college-based route into adulthood. (Why should the state subsidise young people to live away from home to study at university but not at an FE college?) It could make the case for young single parents to have the guarantee of Foyer-style housing, in which they can bring up their children while attending classes to get themselves qualified. And it could propose that instead of arbitrary limits to child benefit by household size, an overall freeze in child benefit levels would liberate resources for the creation of a universal childcare system, as James Purnell has argued.

Labour has been doing a lot of thinking behind the scenes on these issues, but the prime minister has now foreshortened the time left for internal policymaking to each of the political parties. Labour cannot put welfare reform in a box marked ‘tied up by future fiscal rules’ and leave it there for another couple of years. The debates which will frame the next general election are well underway.

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5 Responses to Politics over policy: the PM’s welfare reform agenda

  1. Paul Slade says:

    I think your analysis is on the button. The use of the term ‘entitlement’ is itself interesting. It is used to attack ‘baby boomers’ who have allegedly come to believe that, having experienced the positive impact of the long post war boom, nothing bad will ever come their way, to attack the arrogance of a privileged minority born to power and now to attack the poor for their supposed sense of ‘entitlement’ to benefits to which they are entitled. A club for all seasons!

  2. David says:

    Populism politics? It appears one of their policy setting tests is “What would the Daily Mail do?” This will place many vulnerable and disenfranchised people and families at risk and all but the privaleged few will feel this is crass politics thinly veiled as social policy. So much for the coalition agreement on social mobility!

  3. The Opportunity Society, and a property owning democracy, demand, in addition to an Income Welfare State, an Asset Welfare State, along the following lines (broadly in line with Liberal Party policy (www.liberal.org.uk).

    1. End current quasi-feudal dynastic capitalist inequalities under which some inherit billions while others inherit nothing by abolishing, except between partners, spouses and cohabiting siblings, current unlimited exemptions from Inheritance Tax for lifetime capital gifts and agricultural land, business and shareholding assets and by introducing for all UK-born UK citizens at 25 a UK Universal Inheritance, gradually and thus with not too great a differential between adjacent year groups, in £1,000 annual steps over ten years up to £10,000 – less than 10% of the current average wealth of every adult and child in the country – and hopefully more thereafter.

    2. Finance this UK Universal Inheritance by reforming the current exemption-ridden 40% so-called Inheritance Tax into a 10% Capital Donor Tax on the luxury of all giving and bequeathing capital to UK tax payers (retain the 40% rate for giving and bequeathing to non-UK tax payers). Make this 10% donor tax deductible from a new true inheritance tax, a Lifetime Unearned Capital Tax on cumulative lifetime receipts, including the UK Universal Inheritance, at progressive rates from 10% upwards, so that beneficiaries of moderate amounts have no more to pay than the 10% already paid by donors.

    This will help end alienation, financial and social exclusion and young adult poverty, and will help increase entrepreneurial activity and home ownership, particularly as the amount hopefully increases in the future. All will need a bank account in which to receive the UK Universal Inheritance and through which to receive financial advice. After that, what is and what is not wasted expenditure is for individuals to decide.

    Now would be a good time to spread spending power more widely throughout the country at all levels.

  4. Alan Barton says:

    The proposal to uprate benefits by average earnings rather than CPI struck me as demonstrating the depth of the PM’s ignorance about benefits. As Nick points out benefits have risen at a greater rate than earnings in the last few years. But this is a very unusual situation arising from the recession. When the economy is growing, as it does most of the time, wages rise faster than prices (and hence benefits). So the PM’s proposal would, in the longer term, make out of work benefits higher than under the present system. Is this what he thinks the focus groups want?

  5. Rory O'Kelly says:

    The idea of saving money, or ‘liberating resources’ by cutting or freezing transfer payments is misconceived.

    The current policy of greatly increasing personal tax allowances while freezing Child Benefit transfers money from people with children to the childless. An alternative policy of freezing tax allowances and greatly increasing Child Benefit would move money in the opposite direction. To describe one, but only one, of these policies as a ‘saving’ skews the terms of the debate.