Time to reject short-termism and tackle the drivers of welfare spending

Imogen Farhan

Imogen Farhan

September 20, 2019 | @ImogenFarhan

The Department for Work and Pensions (DWP) spends more than any other government department. In 2018-19, the department spent a total of £187 billion – that’s more than the budget for healthcare and housing combined.

There have been sustained efforts to cut welfare spending in recent years. Since 2013, the welfare cap has set limits on the amount that Government can spend on certain benefits, including disability benefit, tax credits and child benefit. In 2015, the Government introduced a four-year freeze on most working-age benefits and tax credits  – a move that is estimated to have resulted in a total in-year saving of £4.4 billion in 2019-20.

Despite efforts to cut spending, expenditure on benefits and pensions continues to rise. This has occurred alongside a rise in relative poverty.

Total benefit expenditure (Real Terms)

Given the vast majority (97 per cent) of DWP’s budget is demand driven, the best way to reduce benefit expenditure is to reduce demand for it. This requires a change in mindset: instead of focusing on reducing the amount paid to benefit claimants, the government must tackle the structural drivers of spend.

Where is the £187 billion going and what is driving demand?

DWP Benefit Expenditure Summary 2018-19

  1. Pensions

In 2018-19, more than two-thirds of benefit spending went to pensioners, with the State Pension accounting for more than half of all benefit expenditure, at £93.8 billion. Recent changes, including automatic enrolment and an increase to the pension age, have only slowed the rate at which spending is increasing. In fact, the State Pension overwhelmingly accounts for projected future increases in DWP’s welfare spend.

Much has changed since the introduction of the basic state pension over 75 years ago. Most notably, average life expectancy has jumped from 68 to over 80. This, the Treasury Select Committee has concluded, has left the state pension “unsustainable” in its current form. Much of the problem stems from the Government’s commitment to the “triple lock” – a guarantee that the State Pension will rise by a minimum of either 2.5 per cent, the rate of inflation or average earnings growth, whichever is greatest.

But the triple lock is not the only problem. Tax relief is also used to encourage savings: in 2016-17, the cost to the taxpayer of income tax and NICs relief on pensions was around £41 billion. However, tax relief is poorly understood and targeted. In 2015-16, 52 per cent of the total income tax relief paid on pension contributions went to individuals earning £50,000 or above.

In the short-term, the effectiveness of government spend on tax relief to encourage pension savings needs to be re-examined. In the long term, the abandonment of the triple-lock is inevitable. Doing so will require a careful consideration of the alternatives and a concurrent push to drive up private saving. As it stands, however, despite the welcome and significant boost to savings rates achieved by automatic enrolment, millions of people are still expected to under-save for their pensions on current policies, and this savings gap is particularly large among women.

  1. The disability employment gap

Having a disability continues to be associated with greater poverty and reduced access to work. The disability employment gap – which currently stands at 30 percentage points – hasn’t changed in over a decade. Evidence shows that work has positive impacts on health, wellbeing and social inclusion. Supporting disabled people to work is also vital to tackle the long-term drivers of welfare spending.

Nearly 30 per cent of benefit spending (£53.3 billion) goes on supporting people with a disability or health condition, 74 per cent of which (£39.6 billion) is spent on working-age people. It is estimated that supporting 1 per cent more eligible Employment and Support Allowance (ESA) claimants to find work in 2018-2019 would save £240 million.

60 per cent of DWP’s budget for day-to-day running costs (£3.8 billion) is spent on employment programmes designed to help people find and stay in work, including a proportion of which is spent helping people with a health condition or disability find work. In other words, only 2 percent of DWP’s spending is directed towards employment programmes to help people find work.

Upfront investment to help people find work could reduce the need for benefit expenditure further down the line. However, successive changes to disability employment programmes in recent years have not delivered better outcomes; the NAO has concluded that, despite decades of experience supporting disabled people, DWP does not yet know “what works.”

The Government has committed to helping one million more disabled people into work. But constant policy reinvention will fail to deliver better outcomes unless we learn from past mistakes. Understanding how employment programmes can be designed to improve job outcomes for disabled people, how employers can be encouraged to recruit and retain disabled people and the role of disability benefits are all key questions to tackle the disability employment gap.

  1. Housing Benefit

In 2018-19, DWP spent £20.8 billion on housing benefit – the benefit paid to those on low incomes to help cover the cost of rent.  This was more than the total police budget for the same year. Spending on this benefit has doubled since the early 2000s.

Spending on Housing benefit over time

While spending has increased, for most working-age people, housing benefit covers a lower proportion of their rent than in the past due to factors such as the benefit freeze: in 94 per cent of areas in Britain, one in five or less private rented homes are affordable to single people, couples, or small families who need housing benefit. The discrepancy between rents and benefit entitlements is particularly felt in certain parts of the country. For example, the shortfall currently stands at 39 per cent in central London (£881) and 15 per cent (£126) in Bristol, while there is no shortfall in Teeside.

At the same time, spending on short-term sticking plasters such as the Discretionary Housing Payments have increased. Last year, one-third of local authorities had to dig into their own budgets to make up the rents of families affected by welfare reforms – and the latest Spending Round saw an additional £40 million invested into DHPs. While DWP is right to prioritise the housing needs of low-income families, spending more on DHPs is not a long-term solution.

As the Department for Work and Pensions has committed to ending the freeze on Local Housing Allowance rates in 2020, the government must decide what to do next. It has been estimated that the total cost to the Government over a three-year investment to restore Local Housing Allowance rates to cover the cheapest third of private rents is £3.3 billion.

In the long-term, tackling the underlying drivers of high rent through increasing the supply of affordable housing – including genuinely affordable rental properties – is essential. But, while there has been political consensus on the need to build more homes, there has been less clarity about how this necessary step change will be achieved. Supply is important, but so too are issues of affordability, funding, location and quality.

The latest Spending Round has confirmed that the tide is now turning after years of austerity with the Chancellor announcing “the fastest increase in day to day spending in 15 years.” All eyes will now be turning to the Autumn budget, expected later this year. The government must seize this opportunity to reject short-termism and invest in tackling the underlying structural drivers of welfare spending.

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