Working-age Benefits

Baroness Sherlock Excerpts

Thursday 16th November 2017 Lords Chamber

[Baroness Sherlock (Lab)]

My Lords, I commend the right reverend Prelate the Bishop of St Albans for choosing this subject and for managing to get it debated the week before the Budget, which I think is a very coveted spot indeed. In doing so, he has highlighted one of the greatest and most overlooked scandals of the austerity policies pursued in recent years. With apologies, I am going to go through some of the history to this and what I think is wrong with this approach to deciding benefits and then look at why I think it is being done.

Previously the default position was that social security benefits and tax credits were indexed to inflation so they would keep their value. Before 2011 they were linked to the retail prices index or ROSSI—a variant on RPI which excluded housing and some council tax costs. From 2011 they were linked to the consumer prices index and, as the noble Lord, Lord Kirkwood, pointed out, that was contested but did at least preserve the stated intent of ensuring that benefits and tax credits remained in real terms at the level at which Parliament had decided to set them. It meant that Parliament knew what it was voting for when it approved changes to benefit levels.

That changed when the coalition Government decided to limit most working-age benefits to a 1% annual increase for three years from 2013-14. This Government went further and froze those benefits at their 2015-16 cash levels for another four years so they will not rise again in cash terms again until 2020. The frozen benefits include payments on which the poorest families in our society depend. I suggest there are two major problems with this change: one of process and the other of impact. First, it means that Parliament has no idea what it is signing up to—a point made by the noble Lord, Lord Kirkwood—when something is set for four years at a time. The impact assessment for the Welfare Reform and Work Bill, which brought this policy in, showed a projected saving to the Treasury of £3.5 billion by freezing the benefits as opposed to uprating them by CPI, although it noted that:

“These savings will continue in future as increases will be from a lower base”.


But of course inflation changes so the exact saving to the public purse and the corresponding cost to those who get the benefits and tax credits are variable quantities. So the Government asked Parliament to adopt a policy when they could not know the precise impact on the people who would be affected by it.

That is the second problem—the impact has turned out to be severe. This freeze cuts in real terms the incomes of affected households year on year. Inflation is now higher than when the Bill was passed. The impact assessment helpfully cited the OBR inflation forecasts for CPI inflation for every year of the freeze period. They varied between 0% and 1.9%. The forecast for this year was 1.2%. In fact, the CPI 12-month rate last month was 3%. That is good news for the Exchequer which scores a saving much higher than predicted. As David Finch of the Resolution Foundation points out, by 2020 the estimate is that the freeze will have saved the Exchequer some £4.7 billion, a full £1.2 billion more than previously forecast. With CPI at 3%, that makes year three of the benefit freeze alone worth £1.9 billion to the Treasury.

The bad news is, of course, that it is £4.7 billion which would have gone into the budgets of those who get benefits and tax credits and use them to feed their children and pay their rent, and now they will not. As the right reverend Prelate the Bishop of St Albans pointed out, it is worse for the poor because they have to spend more of their income on essentials, such as food, and the inflation rate for food and energy is higher than the 3% general inflation rate. Most forecasts suggest that it will get worse. My noble friend Lord Beecham has revealed the effect of that in his area, and also the significant impact on housing.

CPAG analysed the effect of the freeze before the latest rise in inflation and found that in a universal credit system, the four-year freeze to UC and child benefit uprating will cost the average single-parent family £710 a year and the average couple with children £430 a year. I commend the concern for families of the noble Lord, Lord Elton, for whom I have a great deal of respect, and I admire him for it. One of the reasons I am most worried about this freeze is that it affects most families with children, and that is where the damage is being done. I appreciate his raising that issue.

What will this do to inequality? That was set out in painful detail in a recent report by Hood and Waters of the IFS, Living Standards, Poverty and Inequality in the UK: 2017-18 to 2021-22—there have been catchier titles, I grant you. It uses Treasury and OBR data and macroeconomic forecasts to model the impact on household incomes. Its projections showed this: inequality will rise over the next four years; the official rate of relative poverty after housing costs will rise by two percentage points, driven entirely by child poverty, which will rise by seven percentage points; absolute poverty will remain the same, but pensioner poverty will fall and absolute child poverty will rise by four percentage points. Children must be looking enviously at the triple lock enjoyed by pensioners.

Prices are rising but the real incomes of poor households are falling, and most of those had nothing to spare in the first place. What does the Minister think those families should do? More to the point, why are the Government doing this? We know, because on 30 October, my noble friend Lady Lister asked the noble Baroness, Lady Buscombe, the Minister’s colleague, to describe the Government’s reasoning. The noble Baroness said:

“The benefit freeze is part of a package of welfare reforms that is designed to ensure that the system remains sustainable and to incentivise claimants into work. These reforms are working, and we have not had a lower unemployment rate since the 1970s. The changes we have made to the benefits system allow us to target the support we provide to those who need it most”.—[Official Report, 30/10/17; col. 1156.]


Let me take that Answer apart. First, it is part of a package of welfare reforms. The benefit freeze is not a reform: it reforms nothing; it is simply a cut every single year on year. Secondly, it is designed to ensure the system remains sustainable. Ministers often complain about rising social security spend without giving any context, or referring, for example, to the rising levels of age-related disability, or even without mentioning that spending on out-of-work benefits rises during recessions which, of course, is the safety net kicking in—automatic stabilisers, as economists put it, kicking in. A much better test of sustainability is the cost of social security as a percentage of GDP which has changed remarkably little in recent decades. However, if these cuts go ahead, the OBR Welfare trends report said that by 2020-21 social security spending in support of children and working-age people would be at its lowest share of GDP since 1990-91.

Thirdly, it is to incentivise claimants into work. But this benefit freeze affects people claiming ESA who have been deemed not fit to work yet. It affects mothers of children under one, whom even this Government do not think should work. It affects working tax credit and child tax credit which go to people in work. The same people whose incomes from wages have been squeezed are now finding the system that is meant to top up their household income is being slashed just when they need it most. Fourthly, the changes are to allow us to target the support to those who need it most. Yet the biggest losers overwhelmingly are families with children and especially single-parent families. How is that a good target?

Ministers keep telling us the country cannot afford to pay benefits at decent levels. The coalition Government famously said that,

“those with the broadest shoulders should bear the greatest burden”.

Yet a detailed study by Ruth Lupton et al of the coalition’s social policy record found that,

“the poor bore the brunt of its changes to direct taxes, tax credits and benefits”.

With the exception of the richest 5%, those in the top half of the distribution were net gainers from the changes. The study said:

“Perhaps surprisingly, overall the ‘welfare’ cuts and more generous tax allowances balanced each other out, contributing nothing to deficit reduction”.


Yes, those austerity cuts were not needed to cut the deficit but to pay for tax cuts for the richer.

There we have it. This policy hits the poorest who had no spare cash anyway. It hits low paid workers as well as those who cannot work. It hits children hardest. It will increase poverty and inequality, especially for children. Its impacts will be felt well into the future as these new, lower levels form the basis for any future increases. Every increase in inflation represents a windfall for the Exchequer at the expense of the poorest families in our society. This is unjustifiable. The Government should abandon it now.