Budget 2014: Welfare cap protects wealthier claimants, not those in greatest need

20th Mar 2014

The government's newly-announced welfare cap will disproportionately target benefits claimed by the least well off, says Chris Goulden.

We learnt in the Budget yesterday that the ‘cap’ on welfare spending will be £119.5 billion in 2015-16, rising to £126.7 billion by 2018-19. Sensibly there is a 2% ‘margin of error’ built into these figures (the Office for Budget Responsibility must be getting its message about uncertainty through).

Policy Exchange has a nifty chart showing which benefits the spending goes on, with the lion’s share being £80 billion on the State Pension with tax credits a considerable £25 billion and £23 billion on Housing Benefit. We also learnt that the state pension and Jobseeker’s Allowance (JSA), along with the part of Housing Benefit that gets paid automatically to JSA claimants, are really the only significant components of the welfare budget that are not going to be within the cap.

The stated aims of the cap are to prevent welfare costs spiralling out of control and to ensure that it always pays to work. But, as cross-party think tank the Social Market Foundation points out, the mixed nature of the benefits within the cap, as well as their drivers, means that this goal won’t be achieved. It also begs the question about which households are currently receiving capped benefits and who might be at risk of cuts in the future.

The Office for National Statistics publishes a breakdown of the average household income received from different benefits, which can be split into those in and out of the welfare cap. I’ve used an estimate that 12% of the Housing Benefit spend is passported with JSA, based on these stats. The totals are shown in the chart.

Below: Welfare spending in and out of the cap by income decile.

What’s striking is that benefits are paid all the way up to the richest households and, among the richest three deciles, there is more spending that is not in the welfare cap (albeit virtually all State Pension) than is within the cap. Overall, 30% of spending from within the welfare cap is on the richest half of society but 40% of the protected spend.

Looking within the welfare cap, the biggest areas of specific benefit spending among the richest tenth of households is on Statutory Maternity Pay (an average of £244 per year), Child Benefit (£296) and Disability Living Allowance (£61). At the other end of the scale, among the worst-off tenth, average annual incomes from benefits are £1,081 from tax credits, £874 from Housing Benefit and £509 from Pension Credit, for example.

In not protecting Pension Credit, which mostly goes to the poorest pensioners in society, while putting State Pension for the richest beyond reach, the Chancellor has created a tough test for the Coalition and any future administration to meet. What’s more, the potential drivers of a rising welfare bill – such as our ageing society and levels of disability – are difficult things to control.

Like the majority of the Budget yesterday, this was a plan more for those who already have, and not those on low incomes and most in need of help, as JRF said in its response to the Chancellor's announcements. Decisions on the cap create a risk that this principle will extend to the welfare safety net as well.