You and Yours: can we reduce the benefit bill by £10bn?

Full Fact's Director Will Moy appeared on Radio 4's You and Yours today to talk about mooted proposals for reducing benefits spending by £10 billion. Here as promised we provide the sources for the information he used, and some extra background information either from our preparation or in response to some of the points from listeners.

Where did the idea come from and how firm is it?

• George Osborne, the Chancellor, gave a speech to Conservative Party Conference on Monday in which he said:
  • The Government is committed to reducing or eliminating the deficit (the amount by which national debt increases each year)
  • It has chosen to do this by finding 80% of the money needed through reducing spending and 20% from increasing taxes
  • And he argued that another £10 billion needs to come from reducing welfare spending to avoid it having to come from cuts to departments
• BUT Nick Clegg said at Liberal Democrat Conference two weeks ago: "We will not allow some of these wild suggestions that are coming from the right of British politics that all the savings should come from welfare, and that we should scoop out a £10bn-sized hole in welfare." He added he would also reject "wild suggestions" that he "wave a wand and put a freeze on benefits for two years", saying that would hit the most vulnerable in society. (This was not in the text of his speech, but reported by journalists attending conference)
• So for the moment these possible reductions are Conservative Party proposals, not Government policy.

How big is the benefits budget?

• The UK's Gross Domestic Product for 2011 was £1.5 trillion, according to the UK National Accounts — the Blue Book 2012, which is published by the Office for National Statistics (page 46).
• Total public spending stands at £643.1 billion, according to HM Treasury's Public Finances Databank (Table B1, for Sep 2012)
• The Blue Book also shows (on page 208) that total social benefits spending in 2011 was £200.3 billion, a smidgen under 1/3 of public spending.
• DWP benefits expenditure in 2011/12 will be £158.5 billion, or £84.3 billion if you leave out the state pension.

How big is £10 billion?

• The £10 billion saving is due to be made by 2016/17, the first year of the new Parliament.
• Past benefits expenditure and projections are published by the Department for Work and Pensions.
• BUT they don't include tax credits or child benefit after 2003/04, because those are handled by HM Revenue and Customs. According to the House of Commons Library, HMRC benefit expenditure is forecast at a further £38.7 billion in 2016/17.
• In 2016/17, DWP total benefits expenditure will be £180.2 billion.
• Of that, £95.5 billion will be spent on the state pension, which has been protected against cuts by the Government.
• That leaves £84.7 billlion, and potentially the child benefit component of HMRC benefits, from which to find the £10 billion of cuts.

Where has Mr Osborne suggested the reductions could come from?

Quotes are taken from his speech to Conservative Party Conference. Calculations are from the independent experts at the Institute for Fiscal Studies.

• Cutting Housing Benefit for under-25s: "How can we justify giving flats to young people who have never worked, when working people twice their age are still living with their parents because they can't afford their first home?"
  
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    Total abolition would save nearly £2 billion each year, according to the IFS. However, they point out that there are likely to be practical difficulties with abolishing it for all under-25s and savings would probably be considerably less.
  • The Government may agree. The BBC quotes "Government sources" as saying that projected savings could be just "hundreds of millions."
• Stopping Child Benefit for families with more than 3 children: "How can we justify a system where people in work have to consider the full financial costs of having another child, whilst those who are out of work don't?"
  •  About 330,000 out-of-work families have at least three children, say the IFS, so even if you could reduce their child benefit by £3,000 each on average, that would only save £1 billion in total.
• Breaking the link between benefits and inflation, so they do not increase, or increase less, each year: "For how can we justify the incomes of those out of work rising faster than the incomes of those in work?"
  • The IFS calculates that: "A freeze for all working-age benefits and tax credits would save around £2 billion per year."
  • However, if you only freeze out-of-work benefits (Jobseekers' Allowance, Employment and Support Allowance and Income Support) that can't save anything like the same amount because JSA, ESA and IS add up to £16bn in 2016/17, out of £180bn.

To conclude, the only option on the table known to be able to save £10 billion by 2016/17 is to freeze all benefits for a number of years. The other options floated would only make smaller contribution towards George Osborne's £10 billion target.

Other points

Attitudes to benefits claimants:

• Lots of callers to the show mentioned attitudes to benefits claimants.
  
• The best study is the long-running British Social Attitudes Survey, run by the National Centre for Social Research. The 29th edition has just been published.
• One conclusion was that 62% agree that unemployment benefits are too high and discourage work, more than double the proportion who thought this in 1991 (27%) and a significantly higher proportion than said this was the case in 2007 (54%), so there is evidence of the 'toughening' of attitudes that was mentioned.

Fraud and error in the benefits system (Preliminary 2011/12 estimates from the Department for Work and Pensions):

• £3.2 billion is overpaid (£1.1bn fraud; £1.3bn customer error; £0.8bn official error)
• BUT around £780m of overpayments are recovered each year
• £1.3bn is underpaid

Benefit fraud compared to tax underpayment:

• There are nuances to this, which we have discussed in our article Unpaid tax v benefit fraud: what costs more?
• If you take a broad definition of benefit fraud (including social housing fraud and other things), it adds up to about £4 billion.
• The 'tax gap', which can only be estimated roughly for obvious reasons, is put by HM Revenue and Customs at £35 billion.