GEORGE Osborne has been quick to define 2014’s political agenda. He indicated yesterday what the Conservatives’ offer at the next election is likely to be: completion of deficit reduction in a lower-tax, lower-spend way than Labour, buttressed with continued school reform and tighter control of immigration and welfare. Osborne laid down a challenge to his opponents: if not my plan, then what? Will you borrow more or raise taxes, and where?
With net borrowing forecast in the Autumn Statement to be £111.2bn in 2013-14, or 6.8 per cent of GDP, there is a clear need for further spending restraint. But where should this fall?
Early stages of deficit reduction saw significant tax rises and cuts to investment expenditure, with cuts to day-to-day government spending more back-loaded. Some departments have been squeezed significantly, with the NHS and schools ring-fenced. But making government more efficient has its limits. In finding the further £25bn of savings estimated to be needed, politicians must think more deeply about government’s scope and what the welfare state exists to do.
Both David Cameron and Osborne believe the welfare state’s benefits function should take a further hit. Cameron justified this by saying that the government was controlling departmental spending, but welfare spending kept rising. The Autumn Statement estimated that £180bn will be spent on benefits this year, with a further £28.8bn on tax credits.
Lots of this, of course, is due to an ageing population. Yet the government has in several respects made pensioner welfare more generous. Not only has it committed to maintain the expensive “triple-lock” state pension guarantee, but it’s increased support for social care and kept an unjustifiable universality of sweeties in the form of TV licences, winter fuel allowances and bus passes.
Thus its proposed welfare cap, which will not include the state pension, will inevitably mean cuts to working age welfare. Given individual benefit levels for those who need them are not particularly generous, a welfare spend cap will necessitate a re-examination of eligibility criteria, which for many benefits are too broad.
If welfare is supposed to offer temporary assistance to those in hard times, for example, why has housing benefit become a near permanent payment? What effects does it have on the housing market? Does child benefit create incentives for larger families than some could otherwise afford? It’s no surprise these questions are starting to be discussed.
For years, our welfare state has evolved without comprehensive thought given to what it is supposed to achieve. Cameron is right: a welfare state should reflect values, and approaches to reduce its size should not just be about saving money. But this means he will have to defend his choices, which have hardly been consistent. With child benefit now means-tested, should working taxpayers face more stringent taxes to pay for free TV licences regardless of need? Should the state provide support for wealthy individuals to keep their homes when the owners move into social care – protecting the inheritance of the rich? Should the state provide free school meals for all 5 to 7-year olds, regardless of parental income?
As the old welfare state model collapses, neither party has yet come up with a consistent, principled vision of what the state should do.
Ryan Bourne is head of economic research at the Centre for Policy Studies. @MrRBourne