The savings-hungry government has set its sights on welfare-related Annually Managed Expenditure (AME). At £183bn a year – it’s over half of all government AME spending. The state pension is the largest piece of the pie, accounting for around £80bn. Tax credits cost £25bn and housing benefit £22bn. A radical AME cap has the potential to reduce welfare spending – a point Labour accepts and supports. Following yesterday’s announcement, several observations can be made.
1). It’s a target, not a cap. The language is tough but a firm ceiling on this type of demand-led spending is probably unworkable. A target approach would see a spending limit set at the Budget. The OBR would monitor spending and issue a warning before any projected breach of the limit. But, in the event of a breach, there’s wriggle room for the government. It could find savings from elsewhere or justify overspend to parliament. That’s not the firm credit card limit suggested by the word ‘cap’.
2). Because of this flexibility, a breach could become routine economic business. Missed targets, revised figures and moving goalposts are the norm these days. The stigma is gone.
3). Its feasibility will rely on precise financial forecasts to establish the level of the ‘cap’. Yet ministers will need no reminding that projections are unreliable and problems like low pay and rental inflation, which drive AME, are hard to tackle.
4). Pensioners are out but the disabled are in: a potential dividing line between the Coalition and Labour. Labour originally suggested it would include the state pension in its cap. But yesterday Ed Balls pledged to retain the (unaffordable) triple lock guarantee to increase the state pension by at least 2.5 per cent every year. Including disability benefits is bold; campaigners oppose it.
5). It is highly political. We can assume the first of the AME caps will be announced in 2014, probably set quite low, forcing Labour to endorse it or call for higher welfare spending. It will then come into force in April 2015, just in time for polling day.
6). It could weaken Universal Credit (UC), the government’s flagship welfare policy. Benefits wrapped into UC, such as housing benefit and tax credits, will be subject to the limit. The key principle of UC is to ‘make work pay’ by allowing people to keep more of what they earn, but this becomes harder if rates of support are reduced because the working age welfare pot shrinks. And it could isolate the DWP. The failure of other departments who have a stake in welfare-related AME spend would hit the DWP very hard. This already happens to some extent, such as the failure to deal with soaring rents that increases housing benefit or a lack of skills trapping people in low income and tax credits. But with political pressure and a public ‘cap’ set, ministers at the DWP may find themselves nestled even further into the lap of the Gods.
It’s bold, political and pleasing on the tabloid eye. But, with much detail about the ‘cap’ still unclear, the welfare debate is about to enter yet another phase.
This blog first appeared in the Spectator Coffeehouse Blog