Yesterday’s Autumn Statement and Spending Review – a double-header delight for ‘fiscal event’ addicts like me – demonstrated just how strange the era we are living through has become. The fact is that the social security system has not been one of the main sources of coalition and Conservative government efforts to reduce the budget deficit, yet austerity is understood in precisely these terms within the public consciousness. However, benefit expenditure now will be making a significant contribution to austerity over the next five years – yet Chancellor of the Exchequer George Osborne has now somehow managed to present his latest set of spending plans as a relaxation of the assault on benefits, thereby demonstrating his statesmanlike qualities.
There are several reasons for the Conservatives’ failure to reduce benefit expenditure to date (the overall bill in 2015/16 it will be much the same in real terms as 2009/10). Firstly, the Conservatives’ longstanding commitment to protect pensioner spending, which makes up over 40 per cent of the apparent welfare budget. Indeed, they are committed to spending far more on pensioners (other things being equal) through the operation of the ‘triple lock’ on the state pension.
Secondly, a large chunk of the welfare bill is made up of things like Child Benefit, which benefits affluent as well as poorer households – it has been cut by the Conservatives in office, but its structure remains essentially the same.
Thirdly, far more is spent on Child Benefit, for instance, than Jobseekers’ Allowance (JSA). The latter has been a prime target of government rhetoric on austerity. The government has been unsuccessful in cutting the JSA bill because it isn’t really that large in the first place, and what is spent on JSA is largely a function of deep-rooted structural problems in the UK economy. Jobs are relatively plentiful in the UK’s highly flexible labour market, but not the groups with the most significant barriers to formal employment. So the JSA bill is small, but stubborn.
Fourthly, much benefit expenditure functions as an ‘automatic stabiliser’. When the economy struggles, the benefits bill goes up, to mitigate the downturn. Tax credits for the working poor have been playing this role since the financial crisis, far more than was originally envisaged, because low pay, rather than high unemployment, has been the UK’s principal labour market malfunction. Automatic stabilisation via higher tax credit expenditure has greatly benefited Osborne’s macroeconomic strategy (not that he would ever admit it).
Fifthly, there have been some cuts to Housing Benefit entitlements but, again, actual spend is dependent on economic conditions – and housing costs have been rising as a direct result of Conservative interventions to inflate the housing market.
But if the austerity promised at the 2015 general election, upon which Osborne’s reputation ultimately depends, is to be achieved, he has no choice but to take the axe to the welfare bill. But therein lies the problem: so far, he has built his reputation on claiming that he is cutting welfare spending, without having to deal with the consequences of actually doing so.
Osborne’s response to this dilemma is rather ingenious: he now claims that he is notcutting welfare! After his proposed tax credit cuts were defeated in the House of Lords (in a constitutionally dubious manner), amid a major public outcry, Osborne announced yesterday that he was simply going to abandon the cuts altogether. The Chancellor is apparently listening.
Of course, the cuts will happen anyway, only once tax credit expenditure has been rolled into the new Universal Credit – and households already in receipt of Universal Credit under transitional arrangements will experience the cuts now, in full. Nevertheless, Labour’s planned critique of the tax credit cuts was entirely nullified. Corbyn and McDonnell seemingly failed to see this ruse coming, despite it having been signalled in the small print of House of Commons committee business last week.
Osborne claimed he was able to partially relax austerity on this occasion because of higher tax revenue assumptions arising from the Office for Budget Responsibility’s (OBR’s) fiscal and economic outlook – he hinted that this windfall was a sign of the success of austerity to date, but it emanates mainly from changes to OBR’s modelling rather than any genuine upturn in the UK’s economic performance.
Given the choice between suspending a large chunk of the planned cuts to departmental budgets and reversing cuts to social security, Osborne by and large chose the former. Both sets of cuts are economically destructive, but departmental cuts would be more damaging to George Osborne in the short term for purely political reasons. He has used the slightly artificial tax revenue windfall to avoid an argument with his Cabinet colleagues as he seeks to build support for his imminent leadership bid.
Craig Berry is Deputy Director of the Sheffield Political Economy Research Institute (SPERI). He tweets @craigpberry.
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