He Won't Admit It, But the Rebellious Lords Have Saved George Osborne's Bacon

At the risk of feeding the collective hysteria that characterises public perceptions (or prejudices) of welfare spending, benefit cuts have not yet been one of the main contributors to the coalition or Conservative governments' austerity agenda.

At the risk of feeding the collective hysteria that characterises public perceptions (or prejudices) of welfare spending, benefit cuts have not yet been one of the main contributors to the coalition or Conservative governments' austerity agenda.

There are several reasons for this. Firstly, the Conservatives' longstanding commitment to protect pensioner spending, which makes up over 40 per cent of the apparent welfare budget. Indeed, they are committed to spending far more on pensioners (other things being equal) through the operation of the 'triple lock' on the state pension.

Secondly, a large chunk of the welfare bill is made up of things like Child Benefit, which benefits affluent as well as poorer households - it has been cut by the Conservatives in office, but its structure remains essentially the same.

Far more is spent on Child Benefit than, thirdly, Jobseekers' Allowance (JSA). The government has been unsuccessful in cutting the JSA bill because jobs are relatively plentiful in the UK's highly flexible labour market, for all but the groups with the most significant barriers to formal employment. Indeed, through Universal Credit, the government had actually envisaged spending more, not less, on out-of-work benefits (although this may not now come to pass, if the tax credit cuts are simply saved for another day, once Universal Credit has been fully implemented).

Fourthly, much benefit expenditure functions as an 'automatic stabiliser'. When the economy struggles, the benefits bill goes up, to mitigate the downturn. Tax credits for the working poor have been playing this role since the financial crisis, far more than was originally envisaged, because low pay, rather than high unemployment, has been our principal labour market malfunction.

There have been some cuts, fifthly, to Housing Benefit entitlements but, again, actual spend is dependent on economic conditions - and housing costs have been rising as a direct result of Conservative interventions to inflate the housing market.

But George Osborne clearly feels he has no choice now to do anything other than take an axe to the welfare bill, which means he has little choice but to target the working poor through tax credit cuts (assuming that pensioner protection will remain). If he wavers on his commitment to cutting welfare, then doubts about his insistence that austerity and growth can work in tandem will intensify, jeopardising his long term ideological agenda to reshape the relationship between individuals, market and state.

Or, perhaps, more precisely, Osborne has no choice but to appear that this is what he wants to do. He has quite deliberate fed the collective welfare hysteria by exaggerating how much the UK spends on welfare - SPERI research by Liam Stanley and Todd Hartman demonstrates that the public are far more positive towards welfare spending when different types of spending are categorised in more neutral ways.

But we should not be under the illusion that Osborne actually wants to make these cuts at this time. For one thing, the prospect of targeting the working poor has required him to lend legitimacy to the idea of a much higher minimum wage, because he knows the risks involved in cutting tax credits while earnings growth remains sluggish. The last thing he wants to be doing is endorsing the idea that the state has a role in ensuring that private sector wages are set according to actual living costs. The whole point of austerity is to prove that by accepting self-sufficiency and the logic of the market, and therefore less dependence on the collective mechanisms of the state, we will all be better off, and better people.

As such, he would much rather be making these cuts more slowly over a longer period of time (adopting a flexible approach to deficit reduction that he has been able to get away with in lower profile areas of public spending) as, he hopes, earnings start to rise as the labour market finally tightens.

It is because he cannot possibly admit this that the House of Lords' constitutionally dubious rejection of the cuts has made Osborne's life a lot easier. Paradoxically, he gets to play the part of both welfare zealot, to fulfil his ideological goals, but also demonstrate the statesman-like art of compromise, which will no doubt boost his prime ministerial ambitions.

It seems certain that he will instead cut Housing Benefit, making exactly the same savings, but targeted on an even more vulnerable group - but the fact that he compromised on tax credits is what will surely dominate media coverage on Wednesday afternoon.

The House of Lords did the right thing, but in doing so, they have provided the cover for the Housing Benefit assault, and more importantly, inadvertently saved austerity from its own crippling contradictions. The tax credit cuts as envisaged by Osborne would probably have been quite damaging economically, more so than Housing Benefit cuts, therefore potentially hastening the unravelling of the phoney austerity/growth formula. Their smoother introduction will dampen both this effect and subsequent media scrutiny, allowing the austerity agenda to live another day.

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