151126 Welfare cap
  • The other fiscal target. Yesterday, I wrote about the fiscal targets that George Osborne is expected to hit – those for the deficit and the debt. But there’s another target that he has put in place. In the July Budget, forecasts were made for a subset of welfare spending said to fall under the “welfare cap”. This is spending on most benefits, excluding certain automatic stabilisers and the state pension. The promise was that the Government would stay within these forecasts, allowing a 2 per cent margin to account for forecasting errors. Has this promise been upheld?
  • Once more unto the breach… According to the latest forecasts from the Office for Budget Responsibility, the Government is expected to spend £13 billion more on capped benefits, between 2016-17 and 2020-21, than was expected in July. This means that the cap is set to be breached in each of its first three years. So why does the graph at the top of this post have the third of these years, 2018-19, sitting below the bark blue line that represents the cap? This is because the dark blue line includes the forecasting margin. The Government can spend above the July forecasts by up to 2 per cent, only if this is accounted for by forecasting changes. In the case of 2018-19, it’s not forecasting that has pushed up the total – but spending. The cap is still considered breached.
  • …and once more in future? The cap isn’t expected to be breached in 2019-20 and 2020-21, even though those year’s totals have increased since July. That’s because those increases are accounted for by forecasting changes, rather than by extra spending. But it’s a close run thing. You’ll notice that both years are now almost in excess of the allowed 2 per cent margin. The total for 2019-20 is 0.5 billion below the cap, whilst that for 2020-21 is just 0.2 billion below. Either could easily be recalculated beyond the line.
  • 151126 Welfare cap 2The reasons. What explains the increases since July? I’ve already given the broad answer: forecast changes and spending hikes. There’s plenty more detail in the OBR’s supplementary documentation. On the forecasting front, they emphasise – with graphs such as that to the right, which you can click for a larger version – how they had previously underestimated the number of claimants for disability benefits. On the spending front, they highlight Osborne’s reversal of his tax credits policy, which “increases spending by £3.4 billion in 2016-17 and £1.9 billion a year on average from 2016-17 to 2020-21.”
  • The lesson. None of this is to underplay the benefit cuts. Even with the cap breached, “welfare spending is forecast to fall by 1.7 per cent of GDP between 2015-16 and 2020-21 to its lowest share of GDP in 30 years.” But it is yet another lesson about the precariousness of the fiscal forecasts. Sometimes they change in your favour, as the Chancellor discovered with that extra £27 billion yesterday. Sometimes they change in less agreeable ways, as he’s already found out with welfare spending. As I’ve said before, I wish politicians would legislate more for the latter.