The Department for Work and Pensions spends £340bn on benefits, the biggest spending programme, so its budget is always a target for savings. But it takes time and hard work to save money on benefits.
Benefits reform was one of the issues I worked on in Margaret Thatcher’s Policy Unit decades ago. She focussed on what was then and still is the biggest element of the budget – the state pension which now costs about £138bn.
During the 1970s it had been linked to earnings or prices whichever was higher. Instead from 1980, Margaret Thatcher linked it to prices only. That policy lasted even under Blair and Brown though they introduced more means-tested help for poorer pensioners – the Pension Credit. The Coalition then introduced the triple lock which the OBR estimates now costs £12bn a year more than if we had stuck with an earnings-linked state pension. That increase is roughly what you need to get defence spending up to 3% of GDP.
It is hard to see how any serious effort can be made to reduce benefits spending unless we go back to some kind of earnings link for uprating the state pension. That would still be more generous than the Thatcher/Major link to prices.
Comments on ConHome often dismiss the failures of the politicians of the past and urge the need for a new generation to take tough decisions. But meanwhile, on the biggest single item of public spending, today’s leaders in all parties are not matching the toughness of their predecessors.
The attention now is on disability benefits, notably Personal Independence Payments (PIPs) currently costing about £22bn but rising very fast. There should be savings on public spending here. But again there are some lessons from history. PIPs were introduced by the Coalition. Indeed PIPs were announced in the same 2010 budget as the triple lock – as a saving offsetting some of the costs of the extra spending on pensions.
The forecast was that PIPs would deliver a 20% saving compared with the cost of the Disability Living Allowance for working-age people which they replaced. However after all the hard work of bringing in the new benefit, OBR reported that PIP was in fact costing around 15-20% more than DLA would have done. A forecast saving of £2bn became instead a £4bn increase in spending.
George Osborne and Iain Duncan Smith were not high spenders, happy to see spending rise, but their disability benefits cuts failed to materialise. It is right to try to achieve savings on disability benefits, but they can be hard to deliver. One reason is that whilst pension entitlement is defined by age and after that the rate can be fixed, disability benefits depend on trickier assessments of the type and severity of disability.
As well as the pension triple lock and growing spend on disability benefits, there is a third driver of social security spending. It is a doctrine which goes back to proposals in Opposition before the 2010 Election – a vivid example of why such policy work really matters. It has been embraced by successive Tory ministers.
It is the belief that benefit withdrawal as income increases must be in a straight line. There used to be special kinks and cliffs in the system so that entitlements might cease or a different lower benefit entitlement come in, notably if you are working more than 16 hours and lost entitlement to out of work benefits.
It seems obvious that these features of the system are undesirable complications, so it is right to merge all these different benefits and then have one single and straight taper for withdrawal of the benefit. That view won out in the run up to the 2010 Election.
However the kinks and cliff edges did stop benefit entitlements going far up the income scale. If there is one straight gradual taper then benefit entitlements can go on much further. The old system did mean there were points on the earnings scale system where benefit withdrawal could be 100%. This created acute distortions with for example a bunching of hours worked at 16 hours. However such points of extreme benefit withdrawal saved money overall and meant that in other key parts of the income scale withdrawal rates were not so high.
There is a real policy trade-off here. The reformed system cut the number of people facing extremely high marginal effective tax rates, but increased the number of people facing quite high marginal rates (60% or more) over a wider band of income. And it costs more. There is a real question about which system is better – especially if the aim is to save money.
It is necessary to try to cut the benefits bill. But these three examples have some painful lessons:
– a plan to increase spending on pensions has ended up costing far more than forecast, but appears untouchable;
– a plan to cut disability benefits ended up costing more;
– a deliberate policy design decision has pushed benefit spending up the earnings scale.
Every generation of Conservatives can and should reshape the Party’s policies and learn from the successes and mistakes of the past. Changing personnel is a key part of that, as we are seeing this week. But identifying those lessons by previous generations of Conservatives and understanding what was done and why, is a serious business.