Making the poor pay: the Budget and benefits

Issue 217 (August 2010)

Simon Osborne examines the changes to benefits and tax credits announced in the June 2010 Budget.

Introduction

The lead-up to the June 2010 Budget was a forbidding time for benefit claimants. With the new Coalition Government announcing that we were all ‘in it together’, talk of severe benefit cuts was rife, and the media recycled old prejudices of a system brimming with ‘scroungers’ and ‘welfare dependence’. The Budget measures, amounting to an £11 billion in welfare spending, still came as a shock to those opposed to extending the pain of spending cuts to the poor and the vulnerable. Universal benefits for children and the disabled, help for young families and housing support for the poor and long-term unemployed all came within the crosshairs. Some extra help (via child tax credit increases) was announced, and the Government claims that the changes will not increase child poverty ‘over the next two years’.1 But, despite official claims to the contrary, it already seems clear that some of the very poorest and most disadvantaged will suffer.

The Budget measures

The Budget 2010 Report states: ‘The Government is committed to reforming the working age benefit and tax credit system so that is fair and affordable. The Government’s reforms will reduce benefit dependency and promote work, while protecting those who are most vulnerable and have the highest level of need.’2

The reforms are as follows.3

Benefits uprating

  • From April 2011, the Consumer Prices Index (CPI) will be used for the uprating of all benefits, tax credits and public service pensions, instead of the more generous Retail Price Index (RPI) (but see ‘retirement pensions and pension credit’ below).

Child benefit and tax credits

  • Child benefit rates will be frozen for three years from April 2011.
  • From April 2011, the second income threshold for the family element of child tax credit (CTC) will be reduced from £50,000 to £40,000 and from April 2012 the family element of CTC will be withdrawn immediately after the child element.
  • From April 2011, the first and second withdrawal rates for tax credits will increase to 41 per cent.
  • From April 2011, the baby element will be removed from CTC and from April 2012, the 50-plus element will be removed from working tax credit (WTC).
  • In April 2011, the child element of CTC will increase by £150 above CPI uprating and in April 2012 it will increase by £60 above CPI uprating.
  • The £4 supplement in CTC for each child aged one and two from April 2012, announced by the Labour Government in the March 2010 Budget, will not be introduced.
  • From April 2011, the level of in-year rises in income that will be ignored in tax credit entitlement will be reduced from £25,000 to £10,000 and, from April 2013, to £5,000.
  • From April 2012, the period for which a tax credit claim and certain changes of circumstances can be backdated will be reduced from three months to one month.
  • From April 2012 a disregard of £2,500 will be introduced in tax credits for in-year falls in income.
  • Government contributions to child trust funds will reduce and then stop.

Maternity payments

  • From January 2011, the health in pregnancy grant will be abolished.
  • From April 2011, the Sure Start maternity grant for a second or subsequent child will be abolished.

Lone parents

  • From October 2011, lone parents with a youngest child aged five or above will no longer be eligible for income support (IS) (they may get jobseeker’s allowance – JSA – instead) and existing claimants will be transferred from IS to JSA from April 2012.

Housing benefit and housing costs

  • From October 2011, the local housing allowance weekly rates will be capped at £250 for a one-bedroom property, £290 for two bedrooms, £340 for three bedrooms and £400 for four or more bedrooms; from October 2011, the allowance will be set at the 30th percentile of local rents; from 2013-14, the local housing allowance rates will be uprated in line with the CPI.
  • The freeze on the amount of non-dependant deductions will be ended from April 2011 (they will be uprated on the basis of prices).
  • From April 2013, housing benefit (HB) entitlement for working age people in the social rented sector will reflect family size.
  • From April 2013, HB will be reduced for the long-term unemployed – awards will be reduced to 90 per cent of the initial award after 12 months for claimants receiving JSA.
  • From April 2011, disabled HB claimants with a non-resident carer will be entitled to funding for an extra bedroom.
  • Funding for discretionary housing payments will increase by £10 million in 2011-12 and £40 million in each year from 2012-13.
  • From October 2010, the standard interest rate used to calculate mortgage interest support will be set at a level equal to the Bank of England monthly Average Mortgage Rate.

Disability living allowance

  • •From 2013, ‘an objective medical assessment’ will be introduced for disability living allowance (DLA). There will also be ‘revised eligibility criteria’ which will ‘follow a similar process to the Work Capability Assessment...with a points based system to assess eligibility to the different rates of benefit.’4 It is understood that the new medical assessments will be applied only to claimants of working age.

Retirement pension and pension credit

  • From April 2011, the basic state pension will be uprated in line with earnings, prices or 2.5 per cent, whichever is the highest. The CPI will be used as a measure of prices, but the pension will be increased by at least the equivalent of the RPI in April 2011.
  • In April 2011, the standard minimum income guarantee in pension credit will increase by the cash rise in a full basic state pension.

And there’s more to come

Just a few days after the Budget, the Government issued strong signals that there may be further cuts to the welfare bill to offset potential cuts of up to 25 per cent in other areas like health, higher education, local government and transport. Chancellor George Osborne said, ‘if over the coming couple of months we can find further savings in the welfare budget, then we can bring that 25 per cent number down.’ Prime Minister David Cameron said in Parliament: ‘We want to do everything that we can to keep police officers on the streets, to have money going into our schools and to keep up spending on our hospitals, and the only way that we are going to be able to do it is if we deal with the problem of excessive welfare spending. So if [MPs] want to see police on the streets and if they want to see well-funded schools, they have got to back us on housing benefit and on welfare reform. That is the way we can keep spending up.’5

The Chancellor announced that the spending review will take place over the summer and will report on 20 October 2010.

Impact – the official view

Broadly speaking, the Government makes two main assertions relating to the impact of the changes – one specific and one general. The specific one is that low income families with children are ‘protected’ from the impact of the changes by the above indexation increases to child tax credit. Figures are advanced to show that ‘the overall impact of all modelled Budget changes on child poverty in 2012-13 is statistically insignificant.’6The general claim is that the changes will make the system not only cheaper, but also ‘fairer’. The Budget Report, for example, claims that ‘the Budget announces reforms to the housing and disability and tax credit system to make it fairer and more affordable. These reforms will reduce dependency and promote work.’7

Impact – the wider view

The claim about the effect on child poverty until 2012-13 may be given some credence, given the increases in the CTC child elements in 2011 and 2012. But it is a carefully constructed and quite modest claim. It does not address the problems of the impact of the changes after 2013 or how child poverty is actually to be reduced, and, in any case, is an overall assessment. It masks the effect on particular families – eg, those who have a new baby and will no longer be eligible for a health in pregnancy grant or a maternity grant. Those with a disability may well be adversely affected by the medical test and points-based assessment criteria for DLA, which will lead to a drop in awards for some, given that the central assumption of officials is that the new process, ‘will result in a 20 per cent reduction in caseload and expenditure once fully rolled out8 and the already harsh experience of medical assessments for employment and support allowance. Those with larger families and renting their homes will be vulnerable to the cap to the local housing allowance and/or the 10 per cent reduction in HB for the longterm unemployed.

The Institute for Fiscal Studies (IFS) has calculated that the poorest 10 per cent will see their incomes cut by more than 2.5 per cent over the next five years.9The change to uprating benefits using the CPI rather than the RPI or the Rossi indexes will provide a slow burn benefit cut, as the CPI is usually lower (the IFS projects the CPI will produce the lowest benefit levels of all the indexes between now and 2015)."

Additionally, changes not highlighted in the press, such as the reduction in the tax credits income increase threshold (which will surely lead to more overpayments) and ceasing to take full account of decreases in income (which will leave some stranded on reduced incomes), will inevitably place some poorer claimants in a yet worse position. Again, the interaction of such changes for those with larger families and/or disability, could be particularly harsh. Research by the TUC indicates that at least half a million working families a year will lose more than £1,000 due to these more technical tax credit changes.10This is to say nothing about the disproportionate effect on the poor of cuts to public services and the increase to VAT.

Regarding changes to the local housing allowance, DWP analysis indicates that the ‘families are likely to be affected disproportionately’ by the overall caps and removal of the five-bedroom rate, and within that group some ethnic minority groups may be additionally disproportionately affected. The Department acknowledges that the changes will necessitate some households having to move, especially in central London, and that there may be homelessness or overcrowding in a ‘small’ number of cases.11 Those searching for the fairness and protection to the poor in cutting HB for the long-term unemployed will need to look particularly hard, unless perhaps they are able to agree with Housing Minister Grant Shapps, who told the BBC the amended system was targeting people who were ‘choosing not to work as a lifestyle thing.’12

Comment

Are the changes ‘fair’? Do they protect those who are ‘most vulnerable and have the highest level of need’? The answer in both cases must be ‘no’. Exactly why benefit claimants on very low incomes should pay for a financial crisis that was not of their making has not been made clear by proponents of the changes; many other people will reasonably think that there simply is no such case to be made. Freezing child benefit, cutting maternity payments and cutting HB for the long-term unemployed will hurt the poor (including the working poor), and seem more likely to promote deprivation and homelessness rather than create work incentives.

Similarly, many will think choosing between welfare spending and spending on hospitals and schools is merely to pit the poor against everyone else, and is therefore no sort of choice at all. The people worst affected by the changes will not be ‘scroungers’ but people who have low incomes for a variety of reasons, including sickness and disability, who are fully entitled to the modest and, in many cases, already inadequate benefits they receive. Perhaps it is only when the public debate, and in particular the rhetoric of politicians and the press, become fairer to benefit claimants that we can move towards a welfare system that is truly fair.

 


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  • 1. George Osborne, Budget 2010 speech, 22 June 2010
  • 2. Budget 2010 (HM Treasury, June 2010), paragraph 1.100
  • 3. Budget 2010, paragraphs 2.32-2.59
  • 4. Budget 2010, paragraph 2.58; policy costings (HM Treasury, June 2010), p36
  • 5. Quoted in the Guardian, Thursday 24 June 2010
  • 6. Budget 2010, para A.20
  • 7. Budget 2010, page 3
  • 8. Budget 2010 policy costings, p36
  • 9. Reported in the Guardian, Thursday 24 June 2010; see also www.ifs.org.uk/budget2010/chote.pdf 10See ‘Welfare Savings’ by Mike Brewer, via www.ifs.org.uk/budgets/budgetjune2010/brewer.pdf
  • 10. TUC press release: ‘Half million working families a year set to lose £1,000’, 20 July 2010
  • 11. Equality Impact Assessment: Housing Benefit, DWP, July 2010
  • 12. Quoted in the Guardian, Thursday 24 June 2010