Different and better

Labour should get in its counter-argument to the spending review first

Rarely has something sounding so technical been so political. When the chancellor said he planned to ‘introduce a new limit on a significant proportion of annually managed expenditure’ in his budget speech most eyes will have glazed over. For non-Treasury wonks, ‘AME’ is the part of public spending not allocated in fixed budgets to departments. By far the largest share is social security and tax credits, which now account for almost 30 per cent of government expenditure.

Turning this intention into policy is complicated and contentious. The Liberal Democrats may veto further welfare cuts, while the prime minister is committed to protecting pensioner benefits. However, the politics are crude and clear. The Conservatives want to pose a trade-off between further reductions in (working age) welfare on the one hand and extra cuts to public services, higher taxes or more borrowing on the other. Expect George Osborne to use his spending review in June to set out public expenditure totals well into the next parliament, with a lower profile of AME pencilled in. Then watch him challenge Labour (and the Liberal Democrats) to either back them or attack them.

How should Labour respond to this thoroughly telegraphed political move? The priority is to use one of the few advantages of opposition: the ability to act quickly, without the constraints of Whitehall. By getting its counter-argument in first, Labour can avoid being pinned into the defensive corner of simply having to support or oppose Osborne’s ‘cap’, on his terms, when it arrives. Such an argument might have three components. First, a clear objective to bring the benefits bill down, based on social democratic principles. Second, an analysis of the root causes of higher welfare spending, contesting the dominant ‘scrounger’ narrative. And, third, the outlines of a plausible strategy for controlling and prioritising expenditure, rooted in reform of both the market and the state.

This approach starts from the grounds for centre-left concern about the accelerating shift towards a greater share of public spending being channelled through cash transfers. In contrast, spending on public services is more productive, in supporting employment over consumption. It is more resilient, with popular support for schools and hospitals infinitely greater and deeper than for benefits. And it is more solidaristic, underpinning real relationships rather than bureaucratic transactions. The drift towards AME also makes management of the public finances – and the pursuit of priorities through public spending – more difficult. And subsidising demand can push up prices (as in housing or childcare), unlike the greater value for money achieved through pooling resources in collective services.

More fundamentally, social democrats would make a big mistake in advocating higher welfare spending in principle, or defending the current constellation of benefits as if that were the greatest possible embodiment of their values and ambitions. In some areas expenditure advances goals that would not otherwise be met – security in retirement, protection for those losing their job, independence for disabled people. However, in others, spending results from the consequences of social and economic failure, or market outcomes that increase demands on the state. This should make social democrats angry and impatient for reform.

Labour can avoid becoming the lonely advocate for an inadequate settlement by presenting its own account of rising welfare spending, which is not the result of a sudden spate of unoccupied spare bedrooms. Social security and tax credit expenditure has risen substantially and steadily since the late 1940s, from four per cent of GDP to 13 per cent today. This is the result of demographic trends, economic forces and political choices. There are no doubt strong cyclical dimensions to this spending, but powerful structural drivers too. In short, it is essential that the benefits bill rises during a recession; the problem is that it does not fall when there is growth.

There is a moral obligation on people to take responsibility for their lives and welfare should embody the principle of ‘give and take’. However, structural unemployment, a lack of affordable housing, widespread low pay, expensive childcare and inadequate work opportunities for those with disabilities create the conditions for dependency and inflate the benefits bill. By addressing symptoms only, the coalition is set to oversee a £35bn rise in welfare spending by 2017-18 compared to the start of the parliament, despite £2bn of tactical, populist cuts.

The challenge for Labour is to assemble an alternative social democratic strategy that better controls costs and is more genuinely transformative. With public resources constrained for the foreseeable future, ‘more of everything’ is not an option; even if higher spending on existing benefits were the solution to every problem. The illustrative building blocks that follow are based on ‘different and better’, rather than ‘more versus less’.

A compulsory job guarantee would place an upper limit on unemployment. Shifting over time from housing benefit to bricks and mortar investment, through institutional innovation and the mobilisation of local leadership, would increase housing supply and control rents. Extending the coverage of the living wage, alongside more aggressive increases in the minimum wage, would ease the burden on tax credits. Extending access to high-quality, affordable childcare, by switching a proportion of cash benefits to shared services, would raise the employment rate and advance a more resilient anti-child poverty strategy. Paying for disabled people to work rather than stay on benefits, through greater incentives and obligations on employers, would reduce inactivity. Ensuring education, apprenticeships or work-with-training for all young people would keep them out of the benefits system.

Major reforms along these lines would share the work of advancing social justice, rather than loading it all onto the benefits system. Combined with a plan for jobs and growth, it would accelerate the fall in cyclical spending while controlling structural costs over time. To deliver a down-payment on future reform, Labour should bite the bullet on universal pensioner benefits and bring ‘fiscal welfare’ into scope, by reducing the personal tax reliefs enjoyed overwhelmingly by the better-off. Social democrats also need to strengthen the role of contribution and reciprocity in welfare, but with the chancellor’s ‘cap’ approaching, getting on the intellectual and political offensive on spending is the vital task at hand.

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Nick Pearce is director of IPPR and Graeme Cooke is research director of IPPR

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Comments: 1...

  1. On June 9, 2013 at 9:09 pm Peter Hain responded with... #

    BENEFITS, RECESSION AND GROWTH: CORRECTION

    Nick Pearce and Graeme Cooke of IPPR claim that “the benefits bill rises during a recession; the problem is that it does not fall when there is growth” (Progressonline 31 May 2013). They are wrong. Look at the share of national income we spend on benefits.
    * At the bottom of the last recession in 1993 the UK benefits bill was over 14% of GDP.

    * At the peak of the following boom in 2008 it was below 11% of GDP.

    * The difference is worth some £45 billion pa today. (All figures from the Institute for Fiscal Studies).
    The share of national income that Britain spends on benefits went down when the economy recovered. It only rose again following the 2008 global financial crisis and Britain’s return to recession.

    Peter Hain

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