The benefit cap is right but it will only ever be a short-term solution

July 16, 2013

Over the last 50 years, Britain’s social security benefit bill has increased by 113 per cent as a proportion of GDP. Costing nearly £3,500 for every man, woman and child in Britain, it is by a long way the single largest area of government expenditure.

With this in mind it is unsurprising that the coalition, with significant public approval, has targeted large cuts to the welfare bill. The latest of these, the benefit cap, began to be rolled out in full yesterday. The cap will limit benefits for out-of-work families to £500 a week, or £26,000 a year, and has gained strong support. A recent Ipsos Mori poll showed that some 73 per cent of the public supported the cap “in principle”. This cap, however, does not go far enough.

The first problem is that £26,000 is still a huge amount of money for the state to be handing over to an individual family. The second is that, by focusing on out-of-work families, it does not account for the large sums currently going to families in work, but working relatively few hours. These can also run into sums of well over £10,000 a year.

The key driver of this situation has been that, over time, the benefit system has responded to – and grown to respond to – rising costs of living and the need to ensure that work pays. However, these changes have largely papered over the cracks of a changing economy and labour market, and have failed to tackle the underlying problems. And to do so would require reforms in at least two key areas alongside the benefit cap.

First, the cost of housing need to be tackled. The total bill for housing benefit now stands at well over £20bn a year. But dealing with this will require far more new social and private housing to be built. In the short term, one cost-free way of constructing new social property would be to sell off existing social properties worth more than the regional median value for their size when they become vacant. Doing so would free up some £4.5bn a year for the foreseeable future to invest in 80,000 to 170,000 new social properties each year, boosting employment and cutting the welfare bill.

Secondly, we must reform tax credits. Since their introduction on a large scale after Labour came to power in 1997, they have been a key component in the drive to tackle relatively low income among households with children. However, in practice they tend to subsidise low-productivity, low-pay employment, and further savings should be made here. These savings could then be passed on to businesses in the form of a cut to national insurance contributions, and income losses for families could be offset with a rise in the national minimum wage.

Overall, limiting the total amount of benefits that a family can receive from the state is the right thing to do. But it will only be a short-term solution. If state spending is to be meaningfully reduced in the future, the government must tackle the costs of housing and rationalise financial support for the low paid. Not doing so will mean the taxpayer continuing to pick up the bill for economic failure.

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