If the cap fits…

Senior Policy Officer Paul Anders takes a closer look at the welfare cap and what it means in practice.

The Government’s 2014 Budget introduced a new social security or welfare cap as part of efforts to reduce a social security budget that the Government regularly describes as having got out of control. This has received significant media coverage and I thought it might be worthwhile looking at the consequences of the new cap and how it sits in relation to two other recently introduced caps.

The first of these affected Local Housing Allowance (LHA).  It is part of a number of measures designed to bring down the overall cost of LHA, including uprating LHA amounts by the consumer price index measure of inflation (with a fixed increase of 1% this year and next), moving to the 30^th percentile from the median and introducing an absolute limit of 4 bedrooms regardless of household size and composition. A further change was extending the shared accommodation rate to those aged up to 35, with some exceptions – some of which may apply to people in treatment, if they have, for example, lived in some types of residential services for 3 months or longer.

The second cap to be introduced was the overall benefit cap. This limits claimant household income to the ostensible median wage for comparable working households - £500 per week for couples and single parents with children, and £350 per week for single people without children living with them. The extent to which claimant households are affected by either of these caps depends on a range of variables, but they will primarily tend to apply to larger households and those living in expensive areas such as London and the South East – almost half of the 38,665 households capped to the end of January 2014 were in London.

The 2014 budget introduced a different kind of cap – instead of being targeted at individuals or households to address instances of extremely large claims, the welfare cap is meant to act as a limit to most spending on social security. The cap has been set according to Office of Budget Responsibility (OBR) projections, starting at £119.5bn in 2015-16 and rising to £126.7bn in 2018-19, with a +2% margin. This is out of total social security spending of around £200bn (and total government spending of £720bn, by way of context), this discrepancy being the result of some types of benefit being excluded from the cap:

Included

Attendance Allowance, bereavement benefits, Carer’s Allowance, Christmas Bonus, Disability Living Allowance, Employment and Support Allowance, Financial Assistance Scheme, HB (except HB for JSA claimants), Incapacity Benefit, Income Support, industrial injuries benefits, In Work Credit, Maternity Allowance, Pension Credit, Personal Independence Payment, Return to Work Credit, Severe Disablement Allowance, Social Fund – Cold Weather Payments, Statutory Adoption Pay, Statutory Maternity and Paternity Pay, Universal Credit (except for jobseekers), Winter Fuel Payments, Personal Tax Credits, Child Benefit, Tax-Free Childcare

Excluded

Jobseeker’s Allowance and HB for JSA claimants, Universal Credit for claimants subject to full conditionality and on zero income (i.e. most people currently on JSA), State Pension (basic and additional), transfers (e.g. TV licences for over-75s), benefits paid from DEL (e.g. Funeral Expense Payments, Sure Start Maternity Grants and New Enterprise Allowance)

There was a Commons vote on the cap which attracted cross-party support. The reason? The Government claimed that ‘cyclical’ benefits like Jobseeker’s Allowance (JSA) and housing support for unemployed people had been excluded, meaning that the cap wouldn’t impact on individuals or households affected by a future economic downturn. This resulted in the cross-party support, even though it’s not strictly true: Tax Credits and housing benefit for working claimants are directly influenced by the economy and job market, as is the number of Employment and Support Allowance (ESA) claimants. The same goes for their counterparts under Universal Credit.

What does the cap mean in practice?

It’s important to reassure clients that the cap doesn’t mean that there’s any new limit on individual benefits. Should the OBR indicate that the cap is likely to be breached, the government has to table a motion in the House of Commons:

·         Proposing to increase the cap; or

·         Explaining why spending above the cap is necessary; or

·         Proposing changes to bring spending back beneath the cap.

It’s not clear yet what would happen in the event of the government losing the vote, but we do know that there’s nothing to say that any cuts to bring spending back under the cap would have to come from the particular benefit(s) that have been responsible for breaching it in the first place. It wouldn’t necessarily follow that further increases in the cost of housing support for people in employment (a not unlikely scenario – most new Housing Benefit claims in 2010 and 2011 were made by people in employment) would result in further LHA/HB reductions, although any shortfall would need to come from one or more of the benefits subject to the cap.

Out of control?

A final word about the claim that spending on benefits has got out of control. Given the number of households who are entitled to some sort of social security and changes to the system over time, it’s arguably possible to find figures that support almost any position.

What is pretty clear is that as a percentage of Gross Domestic Product (GDP), spending on benefits (including pensions) has increased. Much of that increase is due to positive reasons (increased life expectancy and sick or disabled people living longer, more active lives than was the case a few decades ago), but there are more negative reasons too. Spending on Housing Benefit for unemployed and employed people has increased, to an extent as a consequence of a reduced stock of social housing and long-term structural problems in the UK housing market, and the cost of Tax Credits and Housing Benefit for employed households reflects a tendency towards low wage employment.

Turning to benefits at an individual level on the other hand, the values of most main benefits have tended to decline compared to average earnings, whether under Conservative, Labour or coalition governments. ESA has declined from around 15.5% of average earnings in in 1995 to around 13% in 2008, before recovering to about 14.5% in 2012. By the same measure, JSA has declined from around 23% in the early 1970s to around 12% in 2012, or, to put it another way, while JSA has almost kept pace with the Retail Price Index measure of inflation, if it had kept pace with average earnings, it would now be worth around £145 instead of £72.40.

Also at an individual level, the Council of Europe’s European Committee of Social Rights suggested in a 2013 report that some individual types of benefits in the UK were too low, although it should be noted that all of the 37 countries reported on were also found to be in breach of European Social Charter requirements, and some to a greater extent. Returning to the macro level, Ha-Joon Chang, a professor of economics at the University of Cambridge, argued in a recent Guardian article that compared to the UK’s OECD peer group, spending on social security as a percentage of GDP is unexceptional. Data from Eurostat suggest that compared to western European peers, welfare spending in the UK may be somewhat lower than the norm. (Incidentally, Eurostat data also suggest that UK spending on employment support and labour market policy interventions is also rather low, even while we have a comparatively demanding conditionality regime – although that is a blog for another day).

It’s complicated

Whether or not the welfare bill is out of control or unaffordable and what the likely impact of spending on social security may be is a question for politicians and other policy makers, as well as macro and behavioural economists. There is evidence that while what we spend on welfare has increased by some measures, it remains unexceptional compared to other countries, and that at an individual claimant level, benefits do not appear particularly generous.

That may seem like fudging the issue, but the reality is, social security is complex, and it’s worth bearing that in mind when sweeping statements are made.