Liberal Democrats reject Steve Hilton’s £25 billion welfare cuts call

David Cameron’s adviser Steve Hilton heads off for a sabbatical in California, where he will be learning more about governance.

However, he is  reported in several newspapers to have left a wee parting present, a paper calling for a further £25 billion cut in welfare spending. He wants to see people, particularly single parents, encouraged into full time rather than part time work. No mention is made of how the resulting child care costs would be met, of course. Maybe he hadn’t thought of that.

The Times (£) reported that these plans had not been shared with the Liberal Democrats but, thankfully, when the paper asked our press people, they got what most people in the party will think is the right instinctive response.

Last night a senior source in Nick Clegg’s party said that there was no question of them approving such a move.

While many of us within Liberal Democrats continue to find some elements of the recent welfare reforms, particularly those which affect sick and disabled people, unpalatable, Hilton’s paper shows how much further the Tories would go, or would have gone if they’d had the chance.

Hilton’s proposed cuts would limit Housing Benefit even further and restrict the Universal Credit so that it incentivises full time work.

The Telegraph is running a poll on whether people would favour further cuts. You would have thought that Telegraph readers weren’t particular fans of welfare spending. However, a majority of respondents either want more information or think enough has been cut from benefits.

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  • Universal credit brings with it ‘in work conditionality’. Families will not claim as a unit but as individuals with one person being designated as the main carer and both will be expected to work. When a child is between 5 and 12 the main carer will be expected to work 20 hours and full time after that. Sanctions can be imposed as in JSA if it is deemed that they are not doing enough to find work, that is the benefit can be withdrawn. People will be expected to ask their employers for extra hours or find a second job. This in itself is leading the way to the 25 billion already. Not many people seem to be aware of what is going to happen to them! Of course there is no work so many will be forced onto workfare and there will be a hell of a lot of latchkey kids. The grandparens will not be looking after them as they will not be retiring but also no doubt will be workfare fodder. I do wonder if the Lib Dems are really aware of the implications of Universal Credit or is it another blind spot?

  • Bill le Breton 16th May '12 - 7:51pm

    It was interesting that in the Hutton/Cable interview Cable’s commitment to NGDP targeting seemed to be as a result of a fear that the currency would lose the competitive advantage of its depreciation before export growth had come through. He saw NGDP target-setting succeeding as via the exchange rate.

    That was probably at £/Euro 1.8. We are now at 2.5. Cable’s concerns have come true and are getting truer by the day.

    I expect that a debate is going on within the Lib Dem leadership on NGDP targeting.

    Huhne was too ‘backdated’ (as the Roger Daltry would have said) to ‘get’ the concept. But he is no more. Does Laws get it? I really hope so, but have no confidence he will.

    The eyes of Clegg and Alexander would glaze over at the thought of having to get their heads round it. But both would look to Laws.

    I don’t see anyone in the DPM team that would be open to the idea. That leaves Cable and Laws as the only hope.

  • Bill le Breton 16th May '12 - 7:53pm

    You are wondering what on earth this has to do with Steve Hilton. Sorry, this post was meant for somewhere else!

  • Giselle Williams 16th May '12 - 8:33pm

    Steve Hilton’s parting shots: £25bn in cuts and a broadside at the civil service

    The Liberal Democrats have already indicated that if there are to be further welfare cuts to be identified before the next election, the first victim should be middle-class welfare, especially the wealthy in receipt of cold weather payments or free bus travel.
    Are people who used to pay 50% on anything over £150,000 considered to be middle-class by the Liberal Democrats?

  • I look forward to seeing Danny Alexander pushed out to promote this 😉

  • Where does Cameron get his advisors from, Coulson, Hilton? It’s like some parallel valueless universe.

  • Alex Sabine 17th May '12 - 3:11am

    If the reports are to be believed, IDS has already dismissed this apparently back-of-the-envelope costing by Steve Hilton.

    That is hardly surprising since he has previously expressed reservations about the more modest £10 billion in welfare savings that George Osborne and Danny Alexander have flagged up as the amount necessary to keep departmental spending cuts in the next Parliament to the same average annual rate as in this Parliament.

    As I understand it, IDS’s position is that an additional £10 billion of savings would only be acceptable if the universal pensioner benefits (winter fuel allowance, free TV licences, free bus passes etc) were no longer treated as sacrosanct and contributed to the savings.

    But while there is room for argument about scale, it is clear that further welfare reforms and savings will be required to deliver the planned spending cuts that both coalition parties have agreed are necessary in the first two years of the next Parliament. Allowing the welfare bill to grow unchecked, in the time-honoured fashion, would necessitate some pretty eye-watering cuts in the ‘frontline services’ politicians are so keen to defend – much larger than those in the current Spending Review period.

    To ground this debate in reality, we need to recognise that the category of spending known in the Treasury jargon as Annually Managed Expenditure (social security, pensions and debt interest) is still growing significantly throughout the Spending Review period, from a baseline of £302.9 billion in 2010-11 to £357.9 billion in 2014-15.

    While overall public spending is forecast to fall by 0.8% per year in real terms, this masks a striking disparity between departmental spending (falling by 2.8% per year on average) and AME (rising by 1.4% per year).

    This general profile was always the case in the coalition’s plans, incidentally; it is not primarily the result of higher unemployment than previously forecast.

    The key drivers are:

    A further big increase in subsidies to public sector pension schemes (even allowing for the increase in employee contributions starting this year). Net public service pension payments are set to rise from £5.6 billion in 2010-11 to £13.2 billion by 2014-15.

    The increasing cost of state pensions over this Parliament, from £69.8 billion in 2010-11 to £86.9 billion in 2014-15 (an increase of almost £10 billion per year in real terms by 2014-15). Only a small part of this is explained by demographics (the number of pensioners is projected to rise from 12.6m to 12.9m); the main reason is the triple lock guarantee for the basic state pension. Increasing the state pension age will help control costs in the medium term, but that won’t even start to deliver savings until near the end of this decade and so is not making any contribution to the current deficit reduction programme.

    A rise in annual debt servicing costs, from £42.8 billion in 2010-11 to £53.2 billion in 2014-15. This compares favourably with a figure of around £70 billion that Labour was forecasting (but chose not to publish, it was revealed in a leaked Treasury document), and reflects the significant fall in gilt yields over the past two years. However, if the current low interest rates rise more quickly than expected then the debt interest bill will obviously go up.

    Leaving aside debt interest, the total bill for transfer payments (benefits and tax credits) is projected to rise from £193.9 billion in 2010-11 to £214.2 billion in 2014-15. This is probably not what many people assume to be happening given the rhetoric about draconian welfare cuts.

    The reality is that welfare and tax credit costs are being modestly pruned, but that these savings are wholly offset by more generous support for pensioners, and more than offset once the rising debt interest bill is taken into account.

    As a result departmental spending (DEL) will account for all the net spending cuts in this Parliament; but had the welfare measures not been taken, the reduction in public service spending would perforce have been much deeper.

    Of course I’m not denying that the coalition is implementing many individually contentious benefit changes which have real consequences. But we do occasionally need to look at the actual figures to get some perspective. They emphasise how much of a challenge it is simply to control the remorseless underlying growth in the welfare bill, which has been a feature of benign economic periods as well as recessions.

    There are no easy answers. For what it’s worth, I don’t think it would be justifiable for the next round of welfare savings to exempt pensioners to the extent that the 2010 Spending Review did.

    The key reform will obviously be Universal Credit, and provided it doesn’t turn into an IT shambles that promises to improve the system greatly for working-age claimants by cutting the penal marginal deduction rates they often face as income rises. But any means-tested benefits system there is an inevitable three-way trade-off between cost, generosity and disincentive marginal rate effects.

  • Oh, Gosh. LibDems against a government proposal, “Man bites dog”.

    Of course there was never any chance of this happening. The oldest trick in the book; put up a scare story then, when the ‘real’ cuts are announced (cuts that we, pre-2010, would have deemed unacceptable) , we’ll see a LDV headline about “Another LibDem Victory”.

  • Daniel Henry 17th May '12 - 10:28am

    What Henry Law said.
    Where are these mysterious jobs we’re trying to “motivate” people to get?

  • What Anne said. Did Lib Dems follow what was in the Welfare Reform Act? In-work conditionality is already here.

  • Richard Dean 17th May '12 - 11:16am

    As a matter of simple principle, might I suggest that savings be first taken from those in work and off benefits, rather from the poorest and neediest in society?,

  • Richard Dean 17th May '12 - 11:17am

    rather -> not (typo)

  • jenny barnes 17th May '12 - 11:49am

    The idea is to increase the pool of idle labour, and make being “not in a job” increasingly unpleasant, so that people will be a) desperate to get a job and b) desperate to keep a job if they have one. This has the effect of enabling employers to reduce the costs of labour (small l) because of course if you’re desperate you’ll work more hours/ take lower wages/ put up with worse conditions (this is known as labour “flexibility” to neo-liberals). having reduced the costs of labour, companies and employers of course make larger profits. This can be increased even more by giving “work experience”/ workfare placements to unemployed people on JSA, and paying them nothing, while with the other hand, as it were, getting rid of your paid workforce.. As Tesco’s was doing till they got caught at it.
    This will reduce demand in the UK economy, making it uneconomic to invest here; so the huge pot of money businesses and banks are sitting on will either not get invested or be invested elsewhere. Either way, I don’t see how current policies are going to enable people in this country to live decent lives ( apart from the 1%)

    Maybe if we set a maximum working hours limit , and a minimum pay level ? Would that share the work out nicely? I know “lump of labour fallacy” but it does seem daft that those in work – or many of them – end up doing a lot of unpaid overtime, while those out of work are idle and poor, just because the magic jobs tree has not been found yet.

  • Alex Sabine 17th May '12 - 1:47pm

    @ Richard Dean
    “As a matter of simple principle, might I suggest that savings be first taken from those in work and off benefits, rather from the poorest and neediest in society?”

    This sounds humane and decent, a “matter of simple principle”. But if we make work pay less relative to out-of-work benefits, we shouldn’t be surprised if we wind up with a persistent increase in the numbers out of work that outlasts the current economic crisis.

    The state already takes a marginal 40% of wages earned above £9,205 (in 2013-14): It takes a much larger slice once you factor in benefit withdrawal tapers. That is why the coalition’s flagship policies like the increased personal allowance and Universal Credit go in the opposite direction, increasing the relative rewards of work.

    The fact that the collapse in demand may be responsible for much of the increased joblessness since 2008 (although there are also skills shortages and other supply-side problems) does not mean policy should be devised as if incentives don’t matter.

    The cost of doing just this is observable in the secular growth of the welfare bill (not simply correlated with economic downturns) as a proportion of both overall government spending and our national income throughout the postwar period.

    As Roger Bootle of Capital Economics – an economist with Keynesian leanings – observed recently: “What I find truly amazing is that about 30pc of all government spending goes on social security – up from about 15pc just after the war.

    Is this the result of a conscious preference by the electorate? Or even a carefully considered expert investigation that concluded that such spending offered good value for money?

    You must be joking. It has just grown like topsy on a tide of good intentions.

    But as welfare spending has grown, so has the number of people who supposedly rely on it.

    This excrescence of money for nothing has been behind many of our social and economic ills. Yet even if the Chancellor pushes through £10bn of cuts, which is currently the subject of intense wrangling, the planned stringency in this area will be minimal.

    The Chinese think there is no clearer sign of our decadence. They are right.”

  • Quite a good summary here of the historical context and issues with welfare spending from the LSE The government’s reduction in spending on the welfare state is greater than any in 90 years

    Importantly, the authors focus on the longer term issues:

    “These immediate issues, however, mask a longer-term problem. Between 1986 and 2008 the share of the GDP going to pay for the welfare state grew by 5 per cent. Yet national revenue fell as a share of national income. Britain’s social policy ambitions outran the electorate’s willingness to pay for them. Or, more accurately, outran politicians’ willingness to ask them.

    Nor will this problem go away. In work I did for the Royal Society of Arts 2020 Commission, I showed that simply to sustain existing service and benefit levels and fulfil promises made by all parties we would need to spend 4 per cent more of our GDP on social welfare by 2030 and 8 per cent more by 2060. We are becoming an older population with all that means for demands on public spending. That figure would be even more if free personal care for the elderly, as in Scotland, were added to the menu. None of that looks in prospect. But private alternatives are not that easy to see either.”

    Fundamentally, we cannot afford, as a country, to have so many working age men and women unemployed or underemployed.. They need to be engaged in productive work and contributing to the support of their grandparents.

    Ever deeper cost-cutting and exclusive reliance on free market solutions will not solve the long term issues. What is needed is some joined up thinkng on how we pay our way as a country in the future, such as:

    – immediate short-term measures in the form of job guarantees for all seekng work, infrastructure spending and monetary stimulus.

    – medium term supply-side messures in the form of liberalised labour market; tax; welfare; planning and banking reforms and

    – Longer term measures in the form of a comprehensive industrial strategy linked with education and skills training and security of energy supplies.

  • Alex Sabine – “What I find truly amazing is that about 30pc of all government spending goes on social security – up from about 15pc just after the war.”

    Its not particularly amazing. I suggest, if you haven’t you read “Two Brains” Willet’s book on how the Baby Boomers have stolen all our money.

    One of the key and very interesting points it makes, is how a welfare system designed for an age where there was a single breadwinner per household, and where that household typically consisted of 2-3 adults and 2-3 children (granparent(s), parent(s) and child(ren), is now having to support a world where there are 3 households in place of that one, and all the attendant costs that go with it.

  • Richard Dean 17th May '12 - 2:29pm

    @Alex. Thanks for your comment. My first impression is that you are relying on a lot of unsubstantiated judgments. Roger Bootle has perhaps not understood that the rise in the welfare bill beyond what had previously been expected might actually be because much of the need for welfare assistance had previously been hidden from view. I suggest that there might be a fair amount of evidence for that in the social science literature, which I do not know.

    It also seems quite wrong to assume that people on above average wages would be dis-incentivized by an increase in taxation to pay for welfare. Quite the reverse. For example, if we were to linking the tax burden on the richest half to the welfare bill, so that higher unemployment levels were clearly seen to result in higher taxes for those in work, then there would be a rather important incentive for those is work to push for investment. Indeed, some of the problem of unemployment comes as a result of employed people doing large amounts of overtime. While it may be harsh to try tax this more, it is perhaps harsher to take the savings from those who have less.

    It’s a game, and here is one approach: If I have a family to support, and my wage goes down if my neighbor is unemployed, I am likely to be motivated to pressure those people who can do so to invest to reduce unemployment. If my wage goes down because of inefficiency in the NHS, or big pharma overcharging, or people getting operations that I regard as cosmetic, then I am likely to put pressure on my political representatives to have these things fixed.

    Welfare cuts aren’t playing the same game. They are playing the one Jenny Barnes describes, They are perhaps also playing Insanity. In this game, you remove everything from a population, till they’ve got nothing more lose, and you hope that this will result in the emergence of Alan Sugar No.’s 2, 3, 4, and 5 who will energize the weak and create the jobs that they and the country needs.

  • Alex Sabine 17th May '12 - 3:25pm

    Thanks Tabman. I am not amazed myself, but I do think the scale of the increase (in good times as well as bad) is sobering.

    Many of those who created the modern welfare state after the war believed (or at least claimed) that the costs would actually fall over time because the welfare state would be so successful in tackling the problems it sought to address. Famously Aneurin Bevan predicted that the costs of the NHS would decline as the nation’s health improved…

    I have indeed read The Pinch, and I agree with both you and Joe that changes in family structure and high numbers of long-term unemployed are key drivers of increased welfare spending. Beveridge’s model of an affordable welfare state was based on full employment, male breadwinners and practically all households contributing to the system as well as drawing from it.

    Indeed it is interesting that National Insurance payments were flat-rate contributions (nothing like a flat percentage of earnings like a proportional tax) until an element of graduation was introduced by the Conservative government in 1961 and further reforms turned it into simply an opaque extension to income tax. (That said, the idea of a strong link between contributions paid and benefits received was a sham from the very beginning.)

    Joe, I wholly agree with you on this point: “Fundamentally, we cannot afford, as a country, to have so many working age men and women unemployed or underemployed.. They need to be engaged in productive work and contributing to the support of their grandparents.”

    I was just pointing out that taxing work more in order to subsidise those out of work (which was my inference from what Richard was suggesting in his post above) isn’t a sensible way to go about this.

    I agree with many of your suggestions, particularly the medium-term stuff on labour market liberalisation, reform of the planning and banking systems, tax reform etc. Energy policy also needs to be much more coherent.

    Given the demographic pressures and the implications for the social security budget, I also think we need to take more radical action in areas like:

    – Raising the state pension age more rapidly than current plans to 70 to reflect increased longevity, and then creating an automatic mechanism linking it to life expectancy. Thus there will be a default assumption that the pension age should rise as we live longer, and politicians will have to make a case to suspend this rather than making a case to raise it having blithely left it unchanged for decades.

    – Streamlining the various universal pensioner entitlements, means-testing some of them and rolling those that remain universal into the basic state pension

    – Pressing ahead with moves to a single-tier state pension and (as Steve Webb rightly points out) making it clear that this is merely a platform which people must increasingly expect to top up with private savings if they are to realise their expectations of a comfortable income in retirement

    – Confronting (and not kicking into the long grass) the challenges of funding decent long-term care, by engaging with and adopting many of the proposals recommended by the Dilnot Commission based on sharing responsibility between families and the state

    As the IMF recently warned, failing to reform pensions, health and social care in the next few years will lead to a huge increase in the tax burden and/or woefully inadequate provision in the decades to come.

  • Richard Dean 17th May '12 - 4:06pm

    @Alex, I am saying that the present crisis is not just economic but also ethical and political, and that counting beans might not be an adequate response.

    An important aspect of politics is the organization of a system that directs pressure where it is needed. If the system is designed so that an increase of unemployment causes sufficient damage to people who are employed, then employed people will put pressure on whoever needs to be pressurized to create jobs.

    I suppose its a bit Stalinesq, but to do nothing is just as much a choice as to do something. Obviously it’s a rather tough approach – a feedback loop that feeds back pain. But £25 billion of welfare cuts is pretty painful too.

  • There is a lot of structural reform work to be done, Alex.

    In 2010, Bank of England governor Mervyn King reportedly said austerity cuts will be so severe that the winner of the general election winner will make itself unelectable for a generation.

    They way things are shaping up in Europe and globally, this period might turn out to be the good times with an even harsher financial climate to be faced in the next parliament.

  • Giselle Williams 17th May '12 - 7:00pm

    Alex Sabine 17th May ’12 – 3:11am

    But while there is room for argument about scale, it is clear that further welfare reforms and savings will be required to deliver the planned spending cuts that both coalition parties have agreed are necessary in the first two years of the next Parliament.
    Alex – are you closely connected, an insider, in the Coalition may I ask? Just wondering if you are able to confirm Alexander’s earlier statement which also seemed to indicate that the Liberal Democrats won’t be running for the next election as a Party but as a Coalition with the Tories. (Very worrying!).

  • Alex Sabine 19th May '12 - 1:00am

    Giselle: I wouldn’t claim to be an insider but I will try to offer some insight on the point you raised.

    The coalition has a deficit reduction plan which both parties have signed up to. As modified in last year’s Autumn Statement, this aims to eliminate the structural current deficit (most, but not all, of the overall budget deficit) by 2016-17.

    For this to have credibility among the creditors who are currently financing us to the tune of about £100 billion per year, the government must set out the tax and spending measures it intends to take to fulfil its plan. In due course, as we get towards the end of this Parliament, this will entail holding another Spending Review, since the one held in 2010 runs out in 2014.

    The government has already indicated that it expects to cut overall public spending by about 0.9% per year in 2015-16 and 2016-17. Key Lib Dem ministers including Nick Clegg and Danny Alexander have publicly backed these plans. Had they not done so then George Osborne’s decision last autumn to spread the fiscal adjustment over an additional two years would not have been credible as a statement of the government’s intent, and it would probably have had to budget for deeper cuts this side of a 2015 general election.

    Of course it might be that the economy is knocked so badly off-course in the next year that even more of the structural deficit remains left to be tackled in the next Parliament, in which case the cuts might have to be bigger or to last longer. But based on the OBR’s central forecasts for the economy and the public finances, two additional years of cuts would close the structural current deficit, the government’s main fiscal mandate.

    The task of the Spending Review to be undertaken late next year or early in 2014 will be to put flesh on the bones of the spending plans, and work out the appropriate balance between savings from departmental budgets and welfare/pensions savings. It is in this context that the £10 billion of additional welfare savings has been mooted as one plausible scenario. As Danny Alexander (who, assuming he is still Chief Secretary, will have a key role in devising the plans) has explained, this is simply the figure that will be required if the government’s overall spending totals are to be met and the cuts to public service spending are to be no deeper than those planned for this Parliament.

    No doubt there will be some haggling and horse-trading between the coalition partners over spending priorities, but Danny has indicated that the plans that emerge will be published and adopted by both parties as a common programme.

    You are right that this will tie each party’s hands to some extent when it comes to manifesto-writing for the next Parliament, at least with regard to years one and two. It may be that the Tories and Lib Dems will commit to tweaking the composition of the plans if returned to office, although doing so would make it harder for departments and public service managers to allocate resources in the most efficient manner on a multi-year basis.

    As a result, I suspect there will be a firm commitment to the plans for 2015-16 and a commitment to the total for 2016-17 but with some scope to vary the detail.

    The trickier scenario – which is looking increasingly likely given the intensifying eurozone crisis – is that progress on reducing the structural deficit will be even slower than current plans envisage. The question of how the government reacts will then be an urgent and acute one.

    Will it repeat what Osborne announced last autumn, ie push out the timeframe for balancing the books to 2018, 2019 or even 2020? Or will it seek to make deeper cuts over the 2014-17 period, which would necessitate changes to current plans for the last year of this Parliament and the first two years of the next one?

    If, as I expect, the Lib Dems urge the former course, the revised plans will have to carry enough credibility with the markets to prevent a sharp rise in bond yields, which would then be particularly costly given the higher stock of debt. This means the markets would have to believe there is a commitment to deliver them regardless of which party wins the next election. The coalition would probably have to sign off at least aggregate spending totals not only for 2015-16 and 2016-17 but for however much longer it expected the structural current deficit to persist.

    Of course, Labour might refuse to back these spending totals, perhaps urging tax rises instead. But unless they really propose to argue that deficit reduction should be spread over three Parliaments, they will have to put their cards on the table. If (say) the coalition suggests the deficit could be cleared by 2018-19, and Labour argues that is too fast, they would have to identify additional cuts or tax rises for 2019-20 and potentially 2020-21. I don’t think they would get away with simply assuming a higher rate of economic growth than that projected by the OBR.

    So the truth is that the room for manoeuvre of all three parties will be heavily circumscribed by the need to maintain market confidence in a heavily drawn-out and protracted deficit reduction programme. The more that the coalition decides to push its fiscal tightening into the next Parliament, the more it will have fill in how those plans would be delivered to avoid the appearance that ‘later’ really meant ‘never’.

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