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WHERE ARE THE BUDGET CUTS COMING FROM?


Despite pledges to cut a further £12bn from the social security budget, £10.5bn appears to be unaccounted for By the Institute for Fiscal Studies


THE Conservative Party manifesto confirmed a long-discussed commitment to find a further £12bn of cuts to the annual social security budget, and to do this by 2017-18. That is an £11.8bn cut in today’s prices. What is meant by a cut here is that


the generosity of the system will be reduced such that annual spending is £12bn lower than it otherwise would have been. Meanwhile wider economic factors or demographic trends might also push spending up or down. But, for example, a fall in benefit spending triggered by an increase in employment would not count as a cut in this sense. Conversely, spending on benefits


remained relatively flat over the last parliament, despite net cuts of about £17bn, as underlying pressures such as falling earnings, growing rents, and growing numbers of older people approximately offset the cuts in generosity. As always, of course, in the event of


unexpected good or bad fiscal news the government would be left with a choice as to whether to allow the planned path of the deficit to change or to adjust its tax or spending plans (or some combination).


What has already been announced? Specific benefits policies in the manifesto make a small step towards the specified total. Freezing most working-age benefits


and tax credits for two years, rather than increasing them in line with inflation, would – given the current low-inflation environment – cut spending by only £1bn under current inflation forecasts. It implies a 1.4% real cut to the affected benefit rates by the end of the two years, which translates into an average loss among the losers of less than £100 per family per year. But it is


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a very broad-based cut, affecting entitlements for about 11 million families. Freezing these benefits for longer would save significantly more, particularly given that inflation is expected to be higher after 2017-18 than before it. Extending the freeze to the end of the parliament would take another £4.25bn off the annual benefits bill under current forecasts. But this is irrelevant for the stated goal of finding savings by 2017-18. Reducing the benefits cap from


£26,000 to £23,000 per year would hit some families with several children and/or high rents hard: the biggest losers would be about 24,000 families who are already capped and who would lose another £3,000 per year (up to 11.5% of their income). But because in total fewer than


100,000 families would be affected and most would lose less than this, the policy reduces spending by only £0.1bn. Evidence from the current cap suggests that, at least in the short-term, a small minority of affected families will respond by moving into work – the cap does not apply to claimants of Working Tax Credit – and that very few indeed will respond by moving house. Similarly, removing housing benefit


from 18-21 year-old jobseekers would be a significant cut for about 20,000 young adults, but the small numbers affected limit the saving to just £0.1bn.


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This would increase the incentive for these individuals to move into paid work, or to claim a different out-of-work benefit instead.


Not yet announced That leaves another £10.5bn of cuts to annual benefits spending that we are yet to hear about. This fiscal year, spending on benefits and tax credits is expected to total about £220bn. The Conservative manifesto pledged to exclude more than 40% of that budget from cuts: it committed to protecting state pensions (and in fact to maintain the ‘triple lock’ on the basic state pension) and universal pensioner benefits, which account for £95bn of annual spending. This almost doubles the proportionate cut implied for the rest of the budget, to about 10%. The biggest items are tax credits


(£30bn) and housing benefit (£26bn). Together they account for almost half of the unprotected spending. Disability and incapacity benefits between them account for almost a further third. Child benefit is the next largest. Some combination of those benefits


are virtually certain to be cut if £12bn of cuts by 2017-18 are to be delivered. CCR-PS


Edited from the report Benefit cuts: where might they come from? by the Institute for Fiscal Studies


June 2015


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