A little-noticed announcement on public spending at last month's Budget looks set to pit pensioners and working-age people against each other in the future over their share of the controversial welfare bill, new analysis from the Social Market Foundation reveals today.
The SMF analysis examines the Chancellor's intention to set a cap on a significant proportion of Annually Managed Expenditure (AME), the part of public spending that includes social security benefits and tax credits. This plan was set out at the Budget when the Chancellor announced he would "... now introduce a new limit on a significant proportion of Annually Managed Expenditure" to "..bring real control to areas of public spending that had been out of control."
The think tank finds that while working-age welfare has been the biggest element of the rise in AME in recent years, it is set to fall in the future as the economy recovers and government cuts take effect. In contrast, pensioner benefits will continue to rise rapidly as the population ages, meaning that further cuts to working age benefits are likely under a cap unless the Chancellor is planning to cut pensioner entitlements.
The SMF analysis also notes that most working-age welfare spending is closely linked to the state of the economy, showing that the vast majority of the recent increase in housing benefit spending will disappear when unemployment falls. This will make it almost impossible for the Chancellor to keep his promise to allow automatic stabilisers - the mechanism that allows benefit spending to go up in a recession - to operate at the same time as clamping down on AME, unless he is prepared to make deep cuts to pensioner benefits.
Commenting on the analysis, SMF Director Ian Mulheirn said:
"The Chancellor is impaled on the horns of a trilemma. He cannot simultaneously cap annual managed expenditure, allow employment-related benefits to respond to the state of the economy, and protect pensioner benefits. One of them has to give. And with pensioner benefits apparently politically untouchable, the likely result is further deep cuts to working-age welfare, despite the Chancellor's pledge to allow job-related benefits to respond to the economy."
The SMF questions the reason for capping AME when significant cuts to the welfare bill have already been made without such a measure.
Ian Mulheirn continued:
"The only real virtue in a cap on AME is rhetorical: it lumps together different elements of unrelated spending, which facilitates cuts to some when others rise. This serves to obfuscate rather than clarify public policy choices about the shape of the welfare state at a time when the Chancellor himself is calling for an open debate about welfare."
Given that recent policy measures to cut the underlying cost of working age welfare have been justified on the basis of soaring costs primarily driven by recession and economic stagnation, the SMF proposes that the government should distinguish between permanent and economy-related changes in spending. This ‘cyclically adjusted' welfare spending would mirror the government's sensible focus on the ‘structural deficit', the think tank says.
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