26/06/2013 13:36 BST | Updated 26/08/2013 06:12 BST

The AME Cap Becomes a Welfare Cap (And Then Only a Partial One)

In his budget statement earlier this year, the Chancellor said that he would set out as part of today's spending review 'a new limit on a significant proportion of Annually Managed Expenditure'.

Today, he announced that the cap will apply to over £100billion of welfare spending, or less than one-third of total Annually Managed Expenditure. Non-welfare spending - on items such as debt interest and locally-financed current spending - are excluded, as are the basic state pension (over half of social security spending) and those elements of welfare spending that are most affected by fluctuations in the economic cycle, such as Jobseekers' Allowance.

The cap will, therefore, apply to tax credits, housing benefits, disability allowances and pensioner benefits such as the winter fuel allowance. It is, however, unclear how it will work in practice once the Universal Credit is introduced and Jobseekers' Allowance gets blurred with other payments.

Details of how the cap will work have yet to emerge, though the Chancellor said in his speech that it will 'reflect forecast inflation' and be set in cash terms. This appears to leave room for the government to set the cap in line with inflation, or to set it higher or lower.

This move is, therefore, another step in the shift from welfare provision based on universal eligibility or need to provision constrained by financial considerations.

But it also looks like an attempt to open up a gap between the Coalition and the Labour Party at the next election. The Coalition is likely to back a cap that is no higher than inflation. This would be a major shift in the trend of spending. Elements of welfare spending that will be affected by the cap - in particular housing benefit - have historically increased much more rapidly than inflation.

But if Labour fails to match the Coalition's plans, the Conservatives - and presumably the Liberal Democrats too - will take every opportunity to dub Labour 'the welfare party'. They will also demand to know what departmental spending they would cut instead.

Tony Dolphin is Chief Economist at IPPR