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George Osborne's benefits cap puts Labour on the back foot George Osborne's benefits cap puts Labour on the back foot
(5 months later)
The introduction in London this month of the government's new £26,000 benefit cap has generated predictably heated debate. Opinion polls show that the policy is popular because the public believe it is fair. Ministers know this and to push the policy they have been willing to walk up to the line marked "misuse of statistics" and step across it. Labour has been forced into a defensive posture, caught between the Scylla of its compassion and the Charybdis of brute politics.The introduction in London this month of the government's new £26,000 benefit cap has generated predictably heated debate. Opinion polls show that the policy is popular because the public believe it is fair. Ministers know this and to push the policy they have been willing to walk up to the line marked "misuse of statistics" and step across it. Labour has been forced into a defensive posture, caught between the Scylla of its compassion and the Charybdis of brute politics.
To capitalise on his political advantage, George Osborne is planning a new, super-sized benefit cap, to cover entire swaths of welfare spending rather than individuals. In the last budget he announced that:To capitalise on his political advantage, George Osborne is planning a new, super-sized benefit cap, to cover entire swaths of welfare spending rather than individuals. In the last budget he announced that:
"We will now introduce a new limit on a significant proportion of annually managed expenditure. It will be set out in a way that allows the automatic stabilisers to operate but will bring real control to areas of public spending that had been out of control."
"We will now introduce a new limit on a significant proportion of annually managed expenditure. It will be set out in a way that allows the automatic stabilisers to operate but will bring real control to areas of public spending that had been out of control."
Annually managed expenditure (AME) is roughly half of all public spending, covering state pensions, working-age benefits and debt interest. The Social Market Foundation has produced an excellent research note on what has driven the recent increase in AME spending and how it will evolve in future years. It shows that with more people being paid generously uprated pensions and with rising government debt interest payments, any cap on a significant proportion of the AME budget in the future will fall on working-age benefits – tax credits, housing benefit, jobseeker's allowance and so on – as it has done in this parliament.Annually managed expenditure (AME) is roughly half of all public spending, covering state pensions, working-age benefits and debt interest. The Social Market Foundation has produced an excellent research note on what has driven the recent increase in AME spending and how it will evolve in future years. It shows that with more people being paid generously uprated pensions and with rising government debt interest payments, any cap on a significant proportion of the AME budget in the future will fall on working-age benefits – tax credits, housing benefit, jobseeker's allowance and so on – as it has done in this parliament.
In June, when the chancellor announces future government spending plans, he will claim that recent growth in the AME budget has been as much structural as cyclical, driven by political choices, not social need, and he will attack Labour for increasing spending on tax credits and welfare largesse. This will allow him to say that new limits to benefit spending will not prevent social security being there for people when they lose their jobs, but instead bear down on the undeserving. He will probably define his benefit cap in cyclically adjusted terms and set out a rolling three-year spending rule for AME, so that it functions more like a departmental spending allocation total.In June, when the chancellor announces future government spending plans, he will claim that recent growth in the AME budget has been as much structural as cyclical, driven by political choices, not social need, and he will attack Labour for increasing spending on tax credits and welfare largesse. This will allow him to say that new limits to benefit spending will not prevent social security being there for people when they lose their jobs, but instead bear down on the undeserving. He will probably define his benefit cap in cyclically adjusted terms and set out a rolling three-year spending rule for AME, so that it functions more like a departmental spending allocation total.
Osborne's real goal is a political one. He wants to make explicit provision for cutting working-age welfare in the next parliament. His coalition partners can prevent him identifying specific welfare cuts, but as chancellor he is well within his rights to set an overall benefit spending total, and so to force others to accept it as the new framework for political debate. If the other parties resist the new welfare envelope, he can ask them which taxes they will increase or which services they will cut in order to maintain benefits. In the Conservative manifesto, he can flesh this out with proposals for specific cuts. Rather than set pensioners against the working-age population, as many have assumed he will do, the chancellor instead will set the protection of spending on valued public services like the NHS against welfare spending.Osborne's real goal is a political one. He wants to make explicit provision for cutting working-age welfare in the next parliament. His coalition partners can prevent him identifying specific welfare cuts, but as chancellor he is well within his rights to set an overall benefit spending total, and so to force others to accept it as the new framework for political debate. If the other parties resist the new welfare envelope, he can ask them which taxes they will increase or which services they will cut in order to maintain benefits. In the Conservative manifesto, he can flesh this out with proposals for specific cuts. Rather than set pensioners against the working-age population, as many have assumed he will do, the chancellor instead will set the protection of spending on valued public services like the NHS against welfare spending.
It is deeply cynical politics, of course, and it may get harder as the cuts bite – we shall see. But unless Labour can set out a new strategic direction for the welfare state and lay out how its own policies would bring down the welfare bill it will be forced to argue against the chancellor on terms that the latter has chosen.It is deeply cynical politics, of course, and it may get harder as the cuts bite – we shall see. But unless Labour can set out a new strategic direction for the welfare state and lay out how its own policies would bring down the welfare bill it will be forced to argue against the chancellor on terms that the latter has chosen.
What might Labour do? It could acknowledge that the key issue is not that AME rises during a recession but that it doesn't come down by enough when the economy is strong, because of underlying drivers like rising rents, high childcare costs, low wages and disguised unemployment among those on inactive benefits. It could therefore argue for shifting more spending out of AME cash benefits and into pro-employment services – for example, from childcare tax credits to childcare services in children's centres, or from housing benefit into building homes. Additionally, it could strengthen the impact of the actual automatic stabilisers.What might Labour do? It could acknowledge that the key issue is not that AME rises during a recession but that it doesn't come down by enough when the economy is strong, because of underlying drivers like rising rents, high childcare costs, low wages and disguised unemployment among those on inactive benefits. It could therefore argue for shifting more spending out of AME cash benefits and into pro-employment services – for example, from childcare tax credits to childcare services in children's centres, or from housing benefit into building homes. Additionally, it could strengthen the impact of the actual automatic stabilisers.
For example, it could build in a cut to employer national insurance contributions if unemployment is high, offering three months of national salary insurance to temporarily unemployed workers, giving extra funding to JobCentre Plus if the claimant count spikes, and amending the payment schedule of the work programme to take account of the cycle so it becomes a true measure of provider performance. Most importantly perhaps, it could develop new fiscal rules that commit to reducing welfare spending if growth is strong, so that AME falls in the upswing, and lay out its own employment plans to give credibility to those rules.For example, it could build in a cut to employer national insurance contributions if unemployment is high, offering three months of national salary insurance to temporarily unemployed workers, giving extra funding to JobCentre Plus if the claimant count spikes, and amending the payment schedule of the work programme to take account of the cycle so it becomes a true measure of provider performance. Most importantly perhaps, it could develop new fiscal rules that commit to reducing welfare spending if growth is strong, so that AME falls in the upswing, and lay out its own employment plans to give credibility to those rules.
All of this is urgent. The chancellor will set out his plans in a matter of months. As it stands, it is his benefit cap mk II that will set the terms of the welfare debate for the next election.All of this is urgent. The chancellor will set out his plans in a matter of months. As it stands, it is his benefit cap mk II that will set the terms of the welfare debate for the next election.
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