Budget: Welfare Savings

  • By Daniel Drillsma-Milgrom

The Summer Budget announced on 8 July contained a number of measures designed to make savings to the welfare bill. This briefing summarises those measures and analyses the implications for London and London boroughs.

 

Overview

The Conservatives’ General Election manifesto contained a commitment to reduce benefit expenditure by £12 billion a year by 2017/18. However, the full detail of how this saving would be made was not published. A two-year freeze on most working-age benefits; a lower household benefit cap of £23,000; and an end to automatic eligibility for housing benefit (HB) for 18 to 21 year-olds were announced, but these measures accounted for a little over 10 per cent of the required £12 billion.

Given the ‘triple lock’ commitment to protect the value of the state pension, promises made to protect child benefit and the political difficulty of cutting disability benefits, there was speculation ahead of the Budget about whether saving £12 billion within two years from the unprotected areas of welfare expenditure was achievable. The Summer Budget, published on 8 July, unveiled measures to save £12 billion in welfare expenditure, but by 2019/20, i.e. over four years, rather than over two.
The list below sets out the measures included in the Budget and the contribution (in brackets) each will make by 2019/20 to the overall £12 billion savings target:

 

  • Four-year freeze on working age benefits (£3.9 billion)
  • Lower income thresholds in tax credits/ universal credit (UC) (£3.3 billion)
  • Reduce social rents by 1 per cent for four years (£1.3 billion)
  • Two child limit on child element in new tax credit and UC claims (£1.1 billion)
  • Remove family element in tax credits/ UC for new claims (£555 million)
  • Align ESA (WRAG) group rate with JSA for new claims (£445 million)
  • Reduce benefit cap to £23,000 (£405 million)
  • Increase tax credit taper rate to 48 per cent (£345 million)
  • Convert support for mortgage interest to loan (£225 million)
  • ‘Pay to stay’ for higher income social tenants (£245 million)
  • Reduce income rise disregard in tax credits (£180 million)
  • End automatic HB entitlement for 18-21 year-olds (£35 million)
  • UC parent conditionality from when youngest child turns three years-old (£35 million)
  • Limit backdating awards to four weeks (Negligible)

Total: £12.1 billion

Alongside these savings, the Budget also included an announcement on funding for discretionary housing payments (DHPs). Over the next parliament, the government will make £800 million available in DHP funding. This will mean funding allocations being maintained at broadly similar levels to those in previous parliament following the introduction of welfare reforms. Details of how the funding will be distributed have not yet been announced.

Commentary

By making the £12 billion of savings to the welfare bill over four years, rather than two, the measures announced in the Summer Budget represent a looser course of action than had been anticipated. Given that making significant savings from the unprotected areas of the welfare bill was always likely to affect those at the lower end of the income distribution or disadvantaged or vulnerable groups, the relaxation of this target is something that boroughs will likely welcome. There are other aspects of the package of savings that are, if not positive, at least not as far-reaching as may have been the case.

London’s exceptional circumstances are most evident in its housing market where rising rental levels have contributed to the growth in housing benefit (HB) expenditure. The savings made from the HB bill are certainly significant, however some of the measures that had been floated in advance of the Budget – such as requiring all recipients to pay 10 per cent of their rents – would have represented even larger savings. Indeed, one measure designed to bring down HB expenditure – the lowering of the overall household benefit cap – includes an implicit acknowledgement of London’s differing circumstances to the rest of the country by setting a smaller reduction in the capital than elsewhere.

Temporary accommodation is another area of HB expenditure where reductions would have disproportionately affected London. London Councils officers have been engaging with officials over recent months to help them understand the pressures on temporary accommodation in the capital. While the reduced benefits cap will have implications for boroughs’ homelessness budgets, temporary accommodation funding was not specifically targeted for savings in this Budget which will be welcomed by borough housing departments facing rising numbers in temporary accommodation.

Nevertheless, the package of savings still represents a large reduction in welfare expenditure and will translate into significant reductions in income for households whose income levels are already low. These measures will have a range of implications for London of which boroughs must be mindful.

A significant proportion of the overall savings comes from lowering the income level at which households start having tax credits withdrawn. At the same time the rate at which they are withdrawn has been increased. These measures will act to reduce the ‘attractiveness’ (in pure financial terms) of both moving into employment and also of increasing one’s hours. Given the fact that London’s employment levels trail those of the country as a whole, and the growing split between entry-level and higher-paid jobs, measures that adversely affect such work incentives are disappointing – not least because they go against the underlying principle of Universal Credit, which is to encourage work by removing financial disincentives to finding and progressing in employment.

While the savings from the HB bill could potentially have been larger, the measures will still be likely to exacerbate the underlying issues of unaffordability in London. Both the freeze on Local Housing Allowance rates for five years and lowering the household benefit cap to £23,000 hold the potential to push more households into rent arrears and to destabilise tenancies. The policy of ending automatic entitlement for housing benefit for 18 to 21 year-olds is a measure with the potential to place a specific group of people into severe difficulty. Much will depend on the exemptions and protections that the government builds in to this policy. Meanwhile the mandated reduction in local authority rents of 1 per cent a year represents a cost shunt that will lead to reductions in income for local authorities and holds the potential to adversely affect investment plans and therefore the supply of new housing.

Lastly a number of the measures will simply mean less generous treatment of the young, the low-paid and the vulnerable. Aligning the rate of Employment Support Allowance with Jobseekers Allowance for those in the ‘work-related activity group’ will mean a lower award for people who have a limited capability for work and could reduce the incentive to move towards the labour market.

Lastly a number of the measures will simply mean less generous treatment of the young, the low-paid and the vulnerable. Aligning the rate of Employment Support Allowance with Jobseekers Allowance for those in the ‘work-related activity group’ will mean a lower award for people who have a limited capability for work and could reduce the incentive to move towards the labour market.

Introducing Universal Credit parent conditionality for the parents of three year-olds could lead to increased use of sanctions in London and possible greater demand on local emergency welfare schemes.

Limiting the child element to two children and removing altogether the family element for new tax credit claims holds the potential to increase child poverty. The latter could be partially negated by the announced premium on the national minimum wage for over 25s. However, while the increase in earnings for some low-paid workers is a significant measure, analysis conducted by the IFS shows that this effect should not be overstated, describing it as “much smaller than the takeaway from tax and benefit changes”.
Most of the measures announced in the Budget will be taken forward through the Welfare Reform and Work Bill in the next session of Parliament. In addition, the autumn Spending Review is another set piece event where further details of some of the measures and issues discussed in this briefing might be revealed. London Councils will be examining in depth the effects of the Budget’s welfare savings measures to help members understand the implications for their boroughs and the services they provide.

Daniel Drillsma-Milgrom