The chancellor is probably sighing with relief that, a mere week after the event, his budget does not appear to have unravelled. Indeed, it seems to have ticked all the relevant boxes: a few giveaways to get some headlines paid for by savings achieved through departmental salami-slicing. No very obvious concessions to those arguing that the state should be spending more, yet no acceleration in the rate of cuts just in case (notwithstanding the official view) it would actually make things worse.
However, there is one announcement he made that has the potential to be with us for a long time. For now it is hidden in the technicalities. He told parliament: ‘We will now introduce a new limit on a significant proportion of annually managed expenditure. It will be set out in a way that allows the automatic stabilisers to operate, but it will bring real control to areas of public spending that had been out of control.’
Nerds of government accounting will know that annually managed expenditure – or AME – is techno-speak for all parts of government spending that cannot be subject to a hard budget constraint. Instead they are demand-driven, when payment is made due to the recipient meeting predetermined criteria – such as for a welfare or debt interest payment. To bring ‘real control’ to these areas of spending would initially seem impossible, by definition. If the number of people on jobseeker’s allowance is correlated to the state of the economy, how can you separately try to keep the jobseeker’s allowance bill in budget?
Except that this now seems to be exactly what is now being considered. The Guardian on Thursday reported a Treasury official as saying ‘We are going to set out how we are going to set out an overall cap on that AME spending. That will evolve in the future once that is up and running. If AME spending is running ahead of forecasts, tough decisions on things like welfare [will have to be made] in order to stay within that cap.’
This should be ringing alarm bells in every anti-poverty campaign group up and down the country. To get the debate moving, here are some possibilities of what it might mean, on an increasing scale from near-benign to somewhat ridiculous.
1. Radical reform of housing benefit. The housing benefit bill is too large and depends far more on the state of the housing market than any budgeting endeavours. The high cost of housing in London rewards landlords at the expense of the taxpayer, and also creates poverty traps for low-paid workers. Capping rents and providing incentives to landlords to transfer their properties to long-term social letting agencies might be a solution that brings the potential bill down in a way the left could embrace.
2. Continue with structural reforms that move people closer to the labour market. In the same vein as Labour’s attempts to move those who could work off incapacity benefit, and to move lone parents with older children off income support, there may be scope for more attempts to provide support for particular groups of individuals to increase their economic activity. This could, on the surface of it at least, reduce AME spending without affecting the automatic stabilisers.
3. An aspirational target for AME spending. Without specific policy interventions to back it up, the government might set a guideline limit for the proportion of the state budget that is covered by AME spending. This could start lenient and be ratcheted more tightly to precipitate real conversations within Whitehall about otherwise-unthinkable welfare reforms.
4. A continuation of the policy of real-term cuts to all welfare budgets, using an uprater that is less than inflation, so as to reduce the overall amount spent on welfare in order to meet a predetermined target.
5. Devolution of welfare budgets to local authorities to administer, accompanied by a fixed grant from the centre, that they can use as they feel is most appropriate. This might lead to different social security benefits in different parts of the country, many different types of policy intervention, and potentially issues of real hardship if resources are spread round more thinly when the economy is weak.
6. A deliberate national policy of counter-cyclical welfare payments: the more people who apply for benefits, the less generous that payment will be, even if the fact of an individual’s entitlement is beyond dispute.
Of course, in one sense this is a trap for Labour; being seen to be weak on welfare is not a vote winner. But if the government goes too far, it also has the potential to cross a reasonableness test, which will cause it difficulties at the ballot box. Whichever it is, we’d better be ready. More details will come at the spending round announcement on 26 June.
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Kitty Ussher is a research fellow at the Smith Institute and a former economic secretary to the Treasury. She writes the monthly Economy column on Progress and tweets @KittyUssher. You can see her own website here
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