Cutting £12bn from the welfare bill? Easy as pie. Here’s how
In their first budgets and autumn statements, as well as in the comprehensive spending review, the coalition was able to make a few sizeable savings simply by playing around with the formulas by which transfer rates are set. A change from RPI-uprating to CPI-uprating, a few temporary freezes, a change in some reference value, and Bob was their uncle.
As long they can hide behind formulas, politicians can afford to be relatively open about ‘where the axe should fall’. Of course, the axe still has to hit somebody, regardless of whether transfers are cut explicitly or through a fiscal sleight of hand. But in the former case, the connection between the blow of the axe and the wound is immediately visible to everybody, while it the latter case, we have to rely on organisations like the Institute for Fiscal Studies to work out what those announcements mean in practice. Now that the scope for fiscal trickery has narrowed, politicians can no longer promise welfare savings without also saying who they want to make worse off. My guess is therefore that over the next parliament, whoever forms the next government, we will see a combination of politicians beating around the bush (‘Let me be absolutely clear about this’), accusations of secret plans and broken promises, poorly executed savings measures that cause unnecessary hardship, and last but not least, stalled progress on fiscal consolidation.
But there is an alternative. A sensible welfare policy would, where appropriate, start on the demand side rather than the supply side; it would start by asking what drives reliance on a particular transfer, and whether something could be done to reduce that reliance.
The most clear-cut case here is Housing Benefit. Spending on HB currently stands at £24.5bn, and is forecast to rise further, despite all the fiddling with the rate-setting formula. As recently as in the early 1990s, despite a recession and a temporary surge in unemployment, the HB bill was only around £11bn in today’s prices. The increase in HB spending since then has been wholly driven by the increase in housing costs. Cutting HB further while ignoring its driver will hit those who have been priced out of the regular housing market, without really delivering commensurate benefits in terms of cost savings.
Alternatively, we could bring back housing costs (in real terms) to where they stood in the early 1990s, because HB expenditure would then automatically follow, and fall back to somewhere around that level as well. Unrealistic? Absolutely not. The early 1990s were by no means a golden age of housing affordability. By that time, house prices in the UK had already doubled in real terms compared to 1970, the largest increase in any OECD country. But in the early 1990s, the worst was yet to come, so moving back to that level would only mean undoing the worst. Hardly an overambitious goal.
In order to do achieve this, politicians would have to overcome their irrational fear of the anti-development brigade. Politicians seem to believe that the level of Nimby outrage is a function of the level of housebuilding, which leads them to believe that by continuing to suppress development, they can contain the wrath of the Nimby lobby. Politicians should have realised by now that that is not the way it works. Rather, there is a fixed amount of Nimby outrage to go round, which is independent of whether we build 400,000, 40,000 or 4,000 homes per year. Suppressing the housing numbers only increases the ratio of outrage per housing unit.
At the outset of the Great Recession, housebuilding in Britain almost ground to a halt, and is only very slowly recovering now. If I were an anti-development campaigner, I would be playing the old 2 Unlimited song ‘Jump for Joy’ at full volume every day. But that is the opposite of what those campaigners are actually doing. The same people who have always been whining that the countryside was disappearing under concrete are still doing precisely that, and the same newspapers which have always amplified that scaremongering are still doing precisely that as well. The conclusion I would draw is that if the anti-housing brigade is constantly whining anyway, even at a time when we’re not even building anything – why not give them something to whine about, by actually getting the houses built? That would be the way to cut billions – much more than just a measly £12bn – out of the welfare budget, and without making the recipients worse off.
 The qualification ‘where appropriate’ has to be added here, because welfare spending also contains a lot of ‘supply-induced demand’. There are transfers which people ‘rely’ on simply because they are there.
 HB rates used to be set equal to local median rents, which has been reduced to rents at the 30th percentile of the local rent distribution. They have also been capped in absolute terms, and the £26,000 welfare cap is, in effect, also just another HB cap (since it would be almost impossible to qualify for benefit payments in excess of £26,000 except through HB).