This week, media reports suggest that ministers are considering freezing benefits as part of plans to cut the welfare budget in the next spending review. The impetus to find savings from the welfare bill is clear, since pensions and benefits account for one third of all government spending. The Chancellor has stated that welfare cuts of £10 billion will be needed in the next spending review if cuts to departmental spending are not be any greater than in the current spending review.
Currently, most benefits are supposed to be increased in line with CPI inflation each year. This was switched from RPI inflation (which tends to be higher) in April 2011, a move which should save the government around £11 billion in 2014-15. IPPR analysis to be published later this week suggests that a further £4 billion could be saved in 2016-17 if all working-age benefits were frozen from 2014-15. This would make a decent contribution to the £10 billion of savings identified by the Chancellor, although it's clear that further cuts would also be needed to achieve that figure.
Freezing working-age benefits would almost certainly weaken the living standards of low-income families, including the millions of working families who rely on tax credits to top up their earnings. The Coalition's reliance on benefit freezes to curb rising welfare spending also suggests they are running out of ideas on welfare reform.
The Coalition came to power promising radical welfare reform, but just three concrete proposals for pensions and benefits featured in the Coalition Agreement. Iain Duncan Smith's Universal Credit, will roll six means-tested benefits and tax credits into a single payment for low-income families. The 'triple lock' guarantees that the value of the state pension will rise with the higher of earnings, prices or 2.5 per cent. Universal benefits for pensioners, including winter fuel payments and free bus passes, will be protected in this parliament.
Rather than allowing the Coalition to cut back on welfare spending, these plans imply rising costs, particularly given the growing number of pensioners in the population. Beyond the Universal Credit reforms, existing working-age benefits have been repeatedly salami-sliced, with a hodge-podge of temporary freezes and tweaks to eligibility. Almost no attempt has been made to understand the drivers of growing welfare spending over the long-term and put in place reforms that might stem rising demand for pensions and benefits.
Welfare spending has been on a fairly consistent upward trajectory since the second world war, increasing in complexity and coverage. Often, this is because the benefits system has had to respond to problems created by the market - such as unaffordable rents, high energy costs or endemic low pay. Successive governments have done too little to deal with these challenges 'upstream', creating growing demand for cash transfers 'downstream'. Government policy has often exacerbated this trend - like the decision in the 1980s to stop building council housing and subsidise private rents instead.
Benefit freezes look like a relatively painless way to cut back on welfare spending, since they are quick to implement and don't require cuts to individual payments. But they are merely a short-term response to the need to close the deficit, not a properly thought-through welfare reform strategy. In the absence of such a strategy, ministers will have to keep freezing benefits to generate year-on-year savings - with serious implications for the living standards of low-income families. An alternative approach would see ministers devising long-term reform plans that tackle the sources of rising demand. This could include reforms to tackle low pay, lower excessive private rents, bring down high energy costs and reduce disability discrimination among employers. But on both sides of the political divide, the lack of radical thinking on welfare spending remains a serious concern given the intense pressures on the public finances.
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