Labour’s route to cutting the welfare bill

When the Chancellor rises to deliver his Autumn Statement next week, he should face two uncomfortable truths. This is the year in which he had predicted, back in 2010, the elimination of the budget deficit. Instead it still stands at around £100bn. Secondly, instead of falling back further, this year, so far, the deficit is rising, and is up 5% on the previous year.

Osborne will of course confront these awkward truths with the smoke and mirror device of a balanced budget Bill. Political gimmickry will be used as a substitute for an admission of policy failure. The Chancellor apparently thinks he can set a trap for Labour. In fact, he provides us with a real opportunity.

We can set out the ways in which you really can achieve substantial and sustainable deficit reduction.

A good place to start is with welfare. The Coalition’s approach has failed. They set out, at the beginning of this Parliament, with the objective of trimming £25 billion from the budget, as a contribution towards securing the elimination of the deficit. In reality, they have delivered only about one-tenth of that figure.

The failure is that the Coalition has been exceedingly tough on the recipients of welfare, by freezing benefit rates, curbing entitlement, capping payments, and taxing ‘spare’ bedrooms. But the toughness towards those supported by welfare has been offset by appalling weakness on controlling the demand for welfare support. A classic case of addressing symptoms while ignoring causes. In fact, it’s worse than that – the Coalition has actually aggravated the causes.

Two areas of welfare in particular illustrate the point.

Firstly, under the Coalition there has been a substantial rise in welfare payments to support those on low income. The total bill for income-related benefits has reached £90bn, of which one-third are tax credit payments. Under the Coalition, fully two-thirds of the non-pensioner spending increase within welfare is on income support.

So while the Coalition spouts success on job creation and falling unemployment, it chooses to overlook the fact that wage compression is causing the welfare bill to surge, in turn making deficit reduction ever harder to achieve.

The minimum wage has been losing real value. According to a KPMG calculation, at least 5 million people in work are earning below a living wage. Average hourly wages, under the Coalition, have fallen by 5.5%. Wage compression has pushed many more people into qualifying for at least some element of income top-up from the welfare budget. Falling real wages have improved business profitability and have created the opportunity for low-wage job creation. But the entire strategy is, in effect, subsidised through the tax payer.

The Coalition’s policy results in the increased demand for income subsidy far outweighing the savings achieved by freezing the benefits paid out.

There is a progressive alternative to this abject policy failure. Real wage growth. The real value of the minimum wage needs to be restored. And the payment of a living wage should be aggressively encouraged, if necessary with incentives through the business tax system. Aside from restoring some social justice, and addressing the widening income disparity across society, this approach will achieve far more on controlling the welfare budget, and the budget deficit, than the Coalition’s failed approach.

Secondly, under the Coalition, there has been a further surge in welfare payments to meet the costs of housing. The Housing Benefit bill – which was fairly steady at £15bn per annum through most of the last Labour government – is now £25bn. It has risen by 28% under the Coalition.

The biggest single driver of the surge in this part of the welfare budget is rising rents, with the situation further aggravated by the dwindling supply of affordable social housing. For the first time in decades, most renters are now in the private sector, where rents are raising fast, up 13% since 2011, 20% in London. Rents are rising faster than wages. As a result, many more people qualify for some support to meet their housing costs, and those costs rise steadily. A significant part of the welfare budget has, in effect, been contracted out to landlords, who have no interest in seeing their subsidy curbed.

There is also a progressive alternative to this abject policy failure. Introduce at least some form of rent control, and start increasing the supply of affordable social housing. It makes no economic sense whatsoever to see the capital budget for social housing construction dwindle, while the budget for subsidising rents rises relentlessly.

Returning to Osborne’s uncomfortable truths, he looks set to promise substantial cuts, probably of around £20bn, to the welfare budget all over again. But without a profound policy change, he won’t achieve them, again. Although he will further suppress the income of the poorest in society.

Labour’s response to Osborne’s dead-end approach should be to say that £20bn of welfare savings are indeed achievable, possibly more. But it’s done by addressing the demand for welfare support, not by beating up on those in receipt of support.

We urgently need policies to deliver real wage growth and a substantial boost to the supply of affordable social housing. Both will also stimulate real economic growth – which will further trim back the welfare budget and help deliver a balanced budget.

James Plaskitt was a welfare minister in the last Labour government