The search for further benefit cuts

The BBC has reported that civil servants and Conservative ministers have been holding discussions about possible cuts to benefits. Options discussed include cuts to child benefit, taxing certain disability benefits, and abolishing a number of non-means-tested benefits altogether, with lower-income claimants partly or wholly protected if they claim means-tested support instead.

It is not clear whether any of these reforms will become Conservative Party policy. All we know is that ministers have been discussing possible options with civil servants. Given the scale of benefit cuts the Chancellor has said he would aim for – £12 billion a year by 2017–18 – it is hardly surprising that such discussions have been taking place. The specific options reported by the BBC constitute a largely predictable list of the kind of policies that civil servants would be likely to put in front of ministers looking for benefit cuts – indeed many were discussed in a chapter of last month’s IFS Green Budget, which considered the options a future government would have if it wanted to cut benefits further.

However, the BBC’s report is a timely reminder that finding significant further savings would involve difficult decisions. The Conservatives’ figure of £12 billion represents around a 10% cut to the £125 billion spent on social security excluding the state pension and universal pensioner benefits (which the Prime Minister has pledged to protect). So far, they have outlined where less than £2 billion of these £12 billion of cuts would come from. The proposal to freeze most working age benefits in April 2016 and April 2017 would save little more than £1 billion per year (given current inflation forecasts). Other confirmed policies add little to this total: lowering the household benefits cap to £23,000 would save a further £150 million, and removing housing benefit entitlement for jobseeker’s allowance claimants aged 18 to 21 around £120 million. That leaves more than £10 billion of cuts still to find.

It is not just the Conservative Party that would face hard choices in this area – the plans set out by the Liberal Democrats last week would also require £3½ billion of cuts to social security by 2017–18. The Labour Party is not currently committed to overall cuts to social security spending.

The table below provides estimates for how much each of the potential reforms reported today might save a future government. If all of these were implemented, the total saving would be likely to fall well short of the missing £10 billion per year that the Conservatives intend to find by 2017–18 (particularly since, as discussed below, some of the savings would be unlikely to be fully realised for some years).

Table: Estimated long run annual saving from possible reforms

Limiting child benefit to two children per family

£1.0 billion (a)

Taxing disability living allowance and personal independence payment

£0.9 billion (a)

Taxing attendance allowance

£0.6 billion (a)

Abolishing contributory jobseeker’s allowance and employment and support allowance

£1.3 billion (b)

Abolishing carer’s allowance

£1.0 billion (b)

Replacing the industrial injuries compensation scheme with an employer-funded scheme

£1.0 billion (c)

Introducing regional household benefit caps

Depends on details

Incorporating council tax support in universal credit

Depends on details


a IFS Green Budget 2015.

b BBC reporting of civil service costings, which differ from those given in the IFS Green Budget. This is likely to be because the Green Budget figures do not account for non-take-up of means-tested benefits.

c DWP benefit expenditure tables.

What would each of these policies mean for the benefits system?

Limiting child benefit to two children per family

Child benefit was a universal benefit payable in respect of all children from its introduction in 1977 until the coalition government started withdrawing it from families in which at least one adult has a taxable income over £50,000. A further cut to child benefit that is reportedly being discussed is to cease payments in respect of the third and subsequent children in each family. In the long run this could save about £1.0 billion per year, with 1.2 million families losing an average of nearly £1000 per year. However, it seems likely that such a policy would apply only to new births or conceptions, so the full saving would not be realised until the 2030s – making it of little consequence in the context of the Conservatives’ ambition to find £12 billion of cuts to the annual benefits bill by 2017–18.

Taxing disability living allowance, personal independence payment and attendance allowance

These disability benefits are currently neither taxed nor means-tested, and so are worth the same cash amount to all recipients. There is an argument for keeping things this way, since the purpose of these benefits is to compensate those with disabilities for the additional costs they face. However, if a future government did want to make savings in this area, making these benefits taxable would reduce their generosity in a way that meant the individuals with the lowest incomes were protected and the highest-income recipients lost the most. We estimate that making disability living allowance and its successor personal independence payment taxable would increase revenues by around £900 million a year, and including attendance allowance (the equivalent benefit for pensioners) would boost revenues by a further £550 million a year.

Abolishing contributory jobseeker’s allowance (JSA) and employment and support allowance (ESA)

Entitlement to contributory JSA and ESA depends not on income but on one’s history of National Insurance contributions. They are remnants of Beveridge’s vision of social insurance, in a working-age social security system in which 80% of spending is now means-tested. This is an area where the coalition has made cuts, limiting the duration of contributory ESA claims (except for the most disabled claimants) to a year from April 2012. A total of £5 billion a year is now spent on contributory ESA and JSA: however, abolishing them would only save a fraction of that amount, since most recipients (those with low incomes) could claim an equivalent amount in means-tested benefits instead. The BBC report suggests the saving would be £1.3 billion a year, with over 300,000 families losing an average of £80 per week. This reform would represent another stage in the slow death of the contributory principle in the working-age benefits system.

Abolishing carer’s allowance

The government currently spends around £2.5 billion a year on carer’s allowance, a benefit for full-time carers. As with contributory JSA and ESA, abolishing the benefit would reduce overall spending by less than that amount as most recipients would be able to claim means-tested benefits instead. The BBC report suggests a saving of around £1 billion a year.

Replacing the industrial injuries compensation scheme with an employer-funded scheme

The government currently spends around £1 billion a year on benefits to compensate individuals with an illness or disability incurred through their work. The policy would be to abolish these benefits, with employers required to set up their own schemes. To the extent that employer-funded schemes replace the support currently available, the reform would shift costs from the taxpayer to businesses. To the extent that they don’t, the reform would reduce the incomes of recipients. It is not clear whether the transfer of costs from the government to employers would happen in full straightaway (e.g. whether the change would apply to existing claimants). Hence the short-term government saving is unclear.

Introducing regional household benefit caps

The current household benefit cap (of £26,000 a year) and the Conservatives’ proposed lower benefits cap (of £23,000 a year) are both much more likely to affect claimants in London than the rest of the UK, because of their higher rents (and consequently higher housing benefit entitlements). Introducing a household benefit cap that varied by region would thus allow a government to make the cap significantly more binding in other areas of the country without further large reductions in the benefit entitlements of those in London. Without details on how these regional caps would be set it is impossible to say how much (if at all) they would reduce spending.

Incorporating council tax support in universal credit

Bringing council tax support within universal credit would be a welcome change, and would in fact be a return to the original intention to incorporate it within universal credit along with the other main means-tested benefits. Keeping them separate threatens to undermine the simplification of the system and rationalisation of work incentives that universal credit promises. But there are several ways in which this could be done, and without further details it is impossible to say by how much (if at all) the move would reduce spending.


Several of the reforms mentioned in the BBC report follow a common theme. Taxing disability benefits hits higher-income claimants but not the poorest. On carer’s allowance, contributory JSA and contributory ESA, the policy being discussed is to abolish the non-means-tested benefit, with lower-income claimants again protected if they claim means-tested support instead. However, this would leave more people relying on means-testing, with the accompanying increased potential for hassle, stigma, non-take-up and a weakening of incentives to work and save. Limiting child benefit to two children per family is different: the losers from this would include many low-income families. Of course there are many other ways of reducing benefit spending: for example, the BBC report does not mention cuts to housing benefit or tax credits, which make up half of working-age social security spending.

Today’s BBC report may tell us little about how a future government would cut benefits. But it does illustrate the scale of the reforms that would be necessary to make significant savings. Even if all of the reforms discussed today were implemented, alongside confirmed Conservative party policies, the total saving would be likely to fall well short of the £12 billion per year that the Conservatives intend. But those reforms would also involve reducing entitlement to child benefit for over a million more families, taxing previously universal disability benefits, and a further erosion of the contributory principle for those of working-age. These may well not be the decisions that a future Conservative government would make. But it is likely they would have to make changes at least as radical as this to find £12 billion a year. We should be told what those changes would be.

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