What does benefit fraud cost the average household?

"BENEFIT cheats swindled every working family in Britain out of more than £2,300 under Labour, a new study reveals." News of the World, 28 November 2010

Background

There is a touch of irony to the notion that the statements on fraud and error in the benefit system are themselves not without the odd slip up.

It is has been widely reported that Chancellor wrongly claimed £5 billion is lost each year due to fraud, when this was a combined figure for genuine errors as well as duplicity. The actual fraud figure was closer to £1 billion.

In August Full Fact showed how a Daily Mail report on the cost of fraud and error failed to mention the fact that underpayments through error were greater than the figure lost by fraud and error combined, leaving the taxpayer actually better off thanks to fraud and error.

So when yet more numbers on the subject cropped up in yesterday's News of the World, Full Fact decided to take a closer look.

Analysis

The £2,300 cost per working family is based on research done by the Conservative party, which found the cost of fraud and error in the benefit and tax credit systems came to £38 billion, for the years in which data is available (figures for the benefits system date from 2000/1 and the tax credit figures are for the years from 2003/4).

Divided by the 16.4 million working households recorded in the last assessment by the Office for National Statistics this gives £2,303 per household.

The arithmetic may be sound but it is not an accurate portrayal of where your household's two thousand pounds went — a much smaller proportion of this total was "swindled" by "benefit cheats".

Starting first with benefits — the figures show that £28.5 billion was overpaid due to fraud and error since 2001.

But of this it is the significant but far smaller figure of £12.3 billion that was actually due to fraud — the rest was due to claimant or official error.

Of tax credit fraud and error which account for the remainder of the £38 billion figure (some 9.2 billion by our reckoning), there is a limited amount of data on how much was down to fraud alone.

It is only from 2005/6 onward that the figure is broken up, but the distinction suggests a very small amount of the "plundered" £9 billion was knowingly stolen.

Since 2005/6 a total of £6.8 billion has been lost due to fraud an error with tax credits. Of this £760 million was estimated to have been lost in fraud — or 11 per cent of the total lost in these years.

This then suggests a figure of £13 billion as the amount we can say with any degree of confidence was lost due to "fraud" specifically, although given the lack of data for 2003/4 and 2004/5 this will be a slight underestimate.

So it seems that of the £2,303 per household, we can only be confident that £788 was duped out of us. The rest was the product of an expensive series of mistakes.

Underpayments

So if most of the £2,303 we lost was down to cock-up rather than con, it is worth looking at how much we actually saved by from oversights of those in the welfare system.

Figures for underpayments in the benefit system only date back to 2004/5. However since then 16.4 billion was overpaid through fraud and error, of which 5.1 billion was fraud. Yet at the same time there were underpayments due to error saving us all £6.4 billion.

With tax credits, the savings were smaller, but of the £6.85 billion over paid we still saved 1.4 billion due to errors causing underpayments.

Taken as a whole this means fraud and error in the benefit system cost us £23.3 billion, but saved us 7.8 billion — or to put in another way, the £1,413 cost to working households since 2004 was offset by £473.

This shows that not only does any portrayal of the cost of fraud and error in the benefits system need to separate fraud from error, but also needs to consider the amount underpaid as well as overpaid.

Conclusion

Because of this, the way the information is portrayed in the News of the World cannot be deemed accurate.

A far smaller proportion of the total which leaks out of the benefits system is lost to fraud. To suggest all of it is "plundered" or "swindled" is patently false.

While three paragraphs in the true nature of the figures is explained, this comes after a headline which reads "£38bn cheats bill" and after the opening sentence quoted above.

Given that the "study" referenced was, in fact, calculations done by the Conservative party, we have tried to establish whether there was anything that would have encouraged the kind of headline used in the News of the World. However, since the figures were not press released, we have been unable to assess how the figures were originally briefed.

UPDATE: Thanks to the Conservative party for sending us a copy of their release. Although we don't have permission to publish it in full, the headline reads "Welfare fraud and error under Labour cost every working family £2,300" and the phrase "fraud and error" appears 14 times in 740 words, so the release is unambiguous that it is dealing with both problems together. The Conservatives were arguing that simplifying the system by introducing the single Universal Credit will help with both.