Press Story

New analysis shows the alternative welfare cuts the Chancellor George Osborne could make in order to alleviate the impact of his planned cuts to tax credits in next week’s Spending Review.

But it leaves the Government vulnerable to the charge it is still hitting working families, and in some cases will drag in people who are in an even more vulnerable position, such as renters, the disabled and those unable to work, through cuts elsewhere in the welfare budget.

It is the first analysis that analyses and costs other welfare cuts the Government could target. It comes after reports suggesting a raid on Universal Credit (UC) by increasing the amount of benefit that is withdrawn for every pound earned had been rejected by the Department for Work and Pensions – so the government must look again at UC and elsewhere, with housing benefit outlined as an alternative target.

The Chancellor will seek savings to offset a partial tax credits U-turn in the years preceding the roll out of UC. Therefore cuts are likely to fall between 2016/17 and 2019/20, rather than exclusively at the end of the parliament (when UC is fully rolled out).

Osborne has to find £4.4 billion savings. Tax credits were originally due to absorb this figure, but the Chancellor has promised to announce remedial measures to smooth the impact of the changes and find the money from elsewhere.

The options include:

Cutting the ‘elements’ of Universal Credit (the value of the benefit awarded to each household/individual before the taper kicks in). The sums involved in the different elements of social security are considerable. For instance, around £25 billion is spent on housing benefit per year, and around £13 billion is spent on Employment Support Allowance (the replacement for Incapacity Benefit). Both of these elements are particularly vulnerable, given that they have been targets of recent reforms, and in particular target out of work benefit claimants.
Letting Housing Benefit take the strain, where the government has a couple of options:

One of the more likely is reviewing the Local Housing Allowance, the housing benefit subsidy in the private rented sector. In 2011, LHA was cut to subsidise rents at the 30th percentile of the market down from the 50th percentile (i.e. rent subsidies used to fund rents in the middle of the rental market, and now correspond to rents in the bottom third). The Government could for instance, reduce this to the 20th percentile of the market, saving an estimated £400 million a year, according to the IFS. Evidence shows that this does not generally reduce market rents - rather tenants end up paying more for where they live. This would be particularly damaging in high cost housing markets where, due to successive freezes to LHA rates coupled with rent rises, fewer and fewer properties are available at the 20th percentile of the market, let alone the 30th. Another option would be to further reduce the welfare cap: this would act as a further housing benefit cut.
A second, similar option would be to make all housing benefit claimants pay 10 per cent of their rents – thus saving around £2.4bn per annum, and affecting 4.8 million households. While this might incentivise households to look for cheaper properties, for households living in the private rented sector, the average impact would be a loss of income of around £570 per year, and £460 per year for social housing tenants. Again, the impact would be particularly hard on those living in high cost housing markets, like London, Cambridge, York and Oxford.

Given recent trends, disability benefits may be also be targeted, as they were in the March budget with little fanfare but a potentially major impact. The budget announced that new claimants of Employment and Support Allowance (ESA) Work Related Activity Group (WRAG) claimants will from 2017 have their ESA benefits cut to Jobseekers’ Allowance rates – a cut of around £2000 per year per claimant (for a claimant claiming for the entire year). Were the government to repeat this process for the other group of ESA claimants, by moving all Support Group claimants (those who have no current prospect of being able to work due to severe health problems), whose average claim is £137 per week to the current WRAG rate (averaging £113 per week), then this would result in a loss of income to seriously disabled people of around £1,200 per year, saving around £1.4bn a year.
Raising the Universal Credit taper rate. The taper rate (the amount of benefit that is taken away for every additional pound earned) is currently 65 per cent, but there are suggestions that it could increase to 75 per cent. Raising the taper rate to 75 per cent would bring in £2.6 billion in 2020. This compares to £3.3bn raised by work allowance cuts in 2020, as announced in the summer budget. A taper increase would affect all households who are earning more than the (now very low) work allowances – and would reduce the returns to work for these low income households. But reports suggest DWP will resist such a change, making the option look unlikely.

Clare McNeil, associate director for work and families at IPPR, said:

“Like the planned cuts to tax credits, our analysis shows the other welfare cuts that the chancellor is probably considering could have a serious impact on the pockets of working families, people who need help to pay their rent or are genuinely unable to work.

“The government faces the same charge which stirred such a strong opposition to the tax credit changes: that they are hitting vulnerable people, but in different areas of the welfare budget.

“The Chancellor is backed into a corner and cannot find an easy way out of his tax credits hole by cutting other areas of welfare. It means cutting the incomes of the poorest and most vulnerable families - relocating the pain rather than removing it.”

Contacts:
Danny Wright – d.wright@ippr.org 07887 422789
Lester Holloway – l.holloway@ippr.org 07585 772633
Sofie Jenkinson – s.jenkinson@ippr.org 07981 023 031