Spending Review – more cuts

Issue 219 (December 2010)

Angela Toal examines the changes to welfare benefits and tax credits announced in the Government’s Spending Review in October 2010.


Introduction

The Government’s Spending Review, which was presented to Parliament on 20 October 2010 and sets out the spending plans of each Department up to 2014/15, included £7 billion of cuts to the welfare budget.1These cuts are additional to the £11 billion of cuts announced in the Budget in June 2010 (see Bulletin 217, pp6–7). This article examines the main changes to benefits and tax credits announced in the Spending Review and their likely impact on claimants. Note that the full details of the changes will only be confirmed when legislation is introduced to implement them.

Main changes

The following measures, which constitute cuts in entitlement, were announced to ensure the welfare system ‘promotes work and personal responsibility’ while controlling expenditure:

  • a household total benefit cap of around £500 a week for a single parent or couple and £350 a week for a single person from 2013;
  • contributory employment and support allowance (ESA) to be limited to one year for those in the work-related activity group from April 2012;
  • disability living allowance (DLA) mobility component to no longer be paid to people in residential care from 2012/13, unless they are fully self-funding;
  • child benefit to be withdrawn from families with a higher rate taxpayer from January 2013;
  • a requirement for working tax credit (WTC) couples to be working at least 24 hours a week between them, with one partner working at least 16 hours a week, to qualify for WTC from April 2012;
  • WTC childcare element to be reduced from the current maximum of 80 per cent of childcare costs to 70 per cent from April 2011;
  • WTC basic and 30-hour elements to be frozen for three years from April 2011;
  • housing benefit ‘shared-room rate’ for single people under 25 to be extended to those aged under 35 from 2012/13;
  • council tax benefit expenditure to be reduced by 10 per cent from 2013/14, with rebates determined locally by local authorities in England, and by the devolved administrations in Scotland and Wales;
  • pension credit maximum savings credit to be frozen for four years from 2011/12;
  • state pension age for men and women to be equalised at age 65 by November 2018 (currently 2020), and increased to age 66 by April 2020 (currently 2024).

The following measures were also announced in the Spending Review:

  • a universal credit to replace the current system of means-tested working-age benefits and tax credits from 2013 to 2017
  • child tax credit child element increases, on top of those announced in the June Budget, of a further £30 above indexation in 2011/12 and a further £50 above indexation in 2012/13;
  • cold weather payments increase to £25 to be made permanent;
  • housing costs 13-week waiting period and £200,000 capital limit to be extended to January 2012 (no reference is made to the two-year limit on receipt of housing costs while on jobseeker’s allowance (see Bulletin 218)

The household benefit cap

The proposal is to cap the total amount of benefit that a household can receive at the post-tax median earnings level of working households. Most benefit payments, including income support (IS), jobseeker’s allowance (JSA), ESA, housing benefit (HB), council tax benefit (CTB), child benefit (CB) and child tax credit (CTC), are included in the cap, apart from one-off payments (eg, from the social fund) and free school meals. Those getting DLA, WTC and war widow’s pensions will be exempt from the limit.

In practice, the cap will be implemented in most cases by restricting HB payments. Large families will be disproportionately affected. Take, for example, a couple with four children getting JSA, CB, CTC and CTB amounting to approximately £370 per week. The household benefit cap would only allow them HB of £130 per week. A quick look at the local housing allowance (LHA) figures for four-bedroom properties shows that in almost all areas the LHA rate (ie, the median cost for such properties) exceeds £130 per week. The benefit cap, together with other housing benefit cuts recently announced, will effectively price many families out of the areas they live in. It should also be borne in mind that a working couple with four children with median net earnings of £26,000 would, in addition to their earnings, receive child benefit and tax credits worth something in the region of £130 per week (nearly £7,000 per year), highlighting the differential treatment afforded to non-working households through the imposition of the £26,000 benefit cap.

Contributory ESA

This benefit is paid on the basis of national insurance (NI) contributions or as ESA ‘in youth’. It is to be limited to 12 months for all claimants (including, it appears, those qualifying under the ‘youth’ rules), other than those in the ‘support group’ – ie, the most severely disabled. The one-year limit will apply to new claims from April 2012. Existing claimants will also have their claim terminated if they have been on benefit for one year or more in April 2012, or whichever date after this coincides with the expiry of one year’s entitlement.2The 13-week assessment phase will form part of the 12 months’ entitlement. People being transferred from incapacity benefit (and presumably severe disablement allowance) will receive 12 months of contributory ESA from the point of conversion. When the benefit stops, it may be replaced by income-related ESA in some cases (the Government estimates that around half of all cases will qualify for some income-related ESA). The biggest losers will be those who cannot qualify for income-related ESA, because they have other income or capital or a partner who is working 24 hours or more per week. In some cases, claimants could lose their sole source of personal income, despite the fact that they may have paid NI contributions for many years when they were working. Around a million claimants are likely to be affected by the change.

DLA mobility component

Payment of DLA mobility component is to be stopped for those in residential care homes from October 2012.3This represents a significant cut in the total income of ‘non-self-funding residents’ who are often only left with a weekly personal expenses allowance of just over £22, plus the DLA mobility component, after paying their assessed charge to the local authority. The mobility component often enables them to pay for trips and visits, which they would otherwise not be able to afford. It is also widely used by homes to organise and fund transport and outings for residents. Those in residential care include not only older people, but also children and adults with profound physical or learning disabilities. The cut will save the Government £130 million per year by 2013/14, but could mean a huge reduction in income and quality of life for many of the most severely disabled adults and children.

Child benefit

Child benefit has an almost universal take-up rate, and, precisely because of its universality, is cheap to administer. The removal of entitlement from higher rate taxpayers (those earning just under £44,000) will add complexity to the system which will inevitably cost more to administer and, in all likelihood, reduce take-up. The Treasury has said that a financial penalty could be applied to higher rate taxpayers who fail to declare that they have a partner getting child benefit, but it remains to be seen how the plan will be implemented, and enforcement would not appear to be a straightforward.

The fact that a household with two earners each earning £43,000 would keep their child benefit (allowing them a total household income of £86,000 plus child benefit), whereas a household with one earner on £44,000 would lose theirs, has been widely criticised. In addition to this, the removal of a source of income which is normally paid directly to women, as the main child carers, may have a detrimental effect on children.

Working tax credit

The Government’s aim to promote employment as the best way out of poverty would appear to be compromised by the cuts to WTC, the main ‘in-work benefit’. The reduction in the maximum help with childcare costs can equate to a cut in income of £30 per week for those with two or more children, and £17.50 per week for those with one child. This will further squeeze the financial differential between benefits and low-paid employment and act as a further disincentive for people to move into work.

Requiring couples to work 24 hours per week between them, with one working at least 16 hours per week, will also act as a disincentive to work. Where previously one member of a couple with children could work 16 hours in a low-paid job and have her/his earnings supplemented by WTC, s/he would now have to work substantially more hours, or both partners would have to work, to qualify for WTC. This will result in a loss of income of £73.15 per week for some low-income households, where one partner is currently working 16 hours per week. There appears to be no exemption for disability.

None of these changes tie in with the Coalition Government’s aim to ‘remove the artificial disincentives created by existing rules about the hours people have to work’ and to ensure that ‘it must always be worth working, even a few hours a week’.4

Housing benefit ‘shared-room rate’

Raising the age for the HB shared-room rate from 25 to 35 is said to ‘reflect the housing expectations of people of a similar age not on benefits’.5: Welfare Spending It means that a single person under 35 in private rented accommodation will have her/his housing benefit limited to the level of a room in a shared property. Current exemptions for people with severe disabilities are to remain. It is unclear whether there will be transitional protection for people already getting HB for a one-bedroom property. The cut is likely to increase levels of debt and homelessness among young people and/or force them to move to smaller and more crowded accommodation.

Council tax benefit

The 10 per cent cut in CTB and the ‘localisation’ of the benefit is likely to produce a wide variety of schemes across the country, creating a ‘postcode lottery’ of levels of entitlement and assistance. It will also inevitably result in reduced entitlement for many of the poorest households. CTB is one of the most underclaimed benefits6 and there is no evidence to suggest that localisation will enhance take-up. Devolving CTB into a myriad of local schemes and excluding it from the scope of universal credit (see p4) is also contrary to the Government’s aim to simplify the benefit system.

Pension credit

Pensioners who have modest savings or other retirement income will have their savings credit frozen until at least 2015. Although not affecting the very poorest pensioners, this cut will cause hardship to many people who have worked and saved for many years to accumulate modest savings and private or occupational pensions.

Conclusion

The Spending Review deepens the harsh cuts to the welfare budget imposed by the June 2010 Budget. The Institute for Fiscal Studies has stated that the tax and benefit changes introduced by the Spending Review are regressive and will affect the poorest in society the most, although this disproportionate impact will be diminished when the removal of child benefit from higher rate taxpayers is fully implemented.6

The cuts are generally targeted at people of working age, particularly those with larger families or who live in more expensive rented properties. Rather than acting as an incentive to work, some of the cuts will clearly act as a disincentive to people entering the labour market.

 


Please be aware that welfare rights law and guidance change frequently. Therefore older Bulletin articles may be out of date. Use keywords or the search function to find more recent material on this topic.

  • 1. HM Treasury, Spending Review 2010 Cm 7942, October 2010, available from www.hm-treasury.gov.uk
  • 2. DWP Working Age Benefits Division, ESA – Time Limiting Fact Sheet, October 2010
  • 3. Maria Miller, Parliamentary question, Hansard, column 928W, 4 November 2010
  • 4. ‘Nick Clegg, ‘Poverty plus a pound isn’t enough’, Guardian, 9 November 2010
  • 5. HM Treasury, Spending Review 2010, October 2010, Box 2.DWP, Income Related Benefits Estimates of Take-Up in 2008–09, 2010
  • 6. Institute of Fiscal Studies, Distributional Analysis of Tax and Benefit Changes, IFS 2010 spending review briefing, 21 October 2010