What's happening to welfare spending?

What’s the reality behind the headlines about benefit cuts and 'bedroom taxes'? And what impact will these reforms have? Simon Wilson investigates.

How much do we spend on welfare?

In the 2011/2012 financial year, the British government spent about £200bn on welfare (including pensions and tax credits), out of a total budget of about £700bn. The Department for Work and Pensions (DWP) spent £159bn on pensions and welfare benefits, making it easily the biggest spender. Of this, £74bn went on state pensions.

The biggest outlays on benefits were housing benefit (£16.9bn), disability living allowance (£12.6bn) and the pension credit and minimum income guarantee (together £8.1bn). Jobseeker's Allowance is a relatively small chunk of spending at £4.9bn, a fraction more than council tax benefit. On top of all this, a further £42bn is paid out through HM Revenue & Customs £30bn in personal tax credits and £12.2bn in child benefit.

How much will the new reforms save?

The government hopes that the multiple benefit cuts introduced this month will save £2.32bn over the next 12 months roughly 1% of the total welfare spend and more each year after that, saving £18bn by 2014-2015.

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This is being achieved by raising benefit rates by a fixed 1% for three years (rather than in line with inflation, as was the case before). This real-terms' (ie, after inflation) cut is scheduled to save £505m this year, and far more later.

There will also be an overall cap on benefits, fixed at the level of average weekly earnings for a working household (£500 for families, £350 for single people). This is designed to cut housing benefit first, saving £290m this year.

Eventually, work and pensions secretary Iain Duncan Smith wants to cut costs further by introducing a single, flexible Universal Benefit, which is aimed at always making it more profitable for people to take on work, than to remain on benefits (although the complexity of introducing such a simple system means that three of the four pilot schemes due to start later this month have been dropped.)

What's the 'bedroom tax' all about?

It's not a tax it's a benefit cut. The 660,000 social housing tenants who are deemed to have an empty "spare room", will lose an average of £14 a week in housing benefit. This has been the focus of much public anger: according to a Labour survey, 97% of those affected will be unable to move house, as councils simply don't have smaller houses available.

However, some of the other changes will affect far more people: up to two million low-income households will soon pay more council tax, and the government predicts that 4.1 million households this year, rising to 9.6 million in two years' time, will be affected by the real-terms cut in benefits.

Do the reforms have public support?

Tentative support. Several right-leaning journalists have argued that the vocal anger of the left-liberal middle-classes is not shared by poorer people. Fraser Nelson of The Spectator cites a YouGov poll for The Sunday Times that found that this month's real-terms cut in benefits has public support (45% for; 35% against; 20% unsure).

However, the better off (social classes ABC1) are rather more likely to favour the cut (48% to 34%) than the worse off (social classes C2DE ; 41% to 35%). Moreover, when asked whether the cut is unfair, the poorer respondents were much more likely than the well off to see it as unfair. That's despite the fact that many people in work are also seeing their incomes fall after inflation.

In other words, the idea that the coalition reforms are opposed only by hand-wringing Guardianistas, but have broad support among the people most likely to rely on welfare, is a bit of a media canard. The reality is that attitudes towards the welfare issue are strongly shaped by voting preference. Conservatives like the cuts (70% to 16%); Labourites oppose them (56% to 27%); and Lib Dems are unsure (41% pro; 35% anti; 23% undecided).

Are the cuts genuinely radical?

Andrew Haldenby of the right-wing Reform think-tank argues that all the government is doing is "shaving off entitlements to the existing benefits without really changing the fundamental structure".

Even Duncan Smith himself has admitted (much to his colleagues' annoyance, ahead of the spending review in June, when he'll be under pressure to deliver even tougher cuts) that his reforms are unlikely to cut spending in real terms, and the UK will have to settle for "managing" growth. And this month's cuts are far less harsh than those seen, for example, in Ireland.

Nevertheless, they are both historic and risky, partly because of the economic backdrop. Generally in a recession, welfare spending rises as earned income falls. This acts both as a safety net for the poor and for those temporarily without jobs, and as an "automatic" fiscal stabiliser, helping to prevent a bigger fall in demand and a worse recession.

What the government is attempting is steep "countercyclical" welfare cuts during a recession something not done since the 1920s and the social consequences are unpredictable.

Attitudes to welfare

There's no doubt that attitudes towards benefits have hardened as times have got tougher for the majority. According to a British Social Attitudes survey, in 2003, 82% of those on benefits agreed that "the government should be the main provider of support to the unemployed", but by 2011 that proportion had fallen to 62%.

Moreover, support for the view that "unemployment benefits are too high and discourage work" has risen steadily: only 40% of benefits recipients agreed in 2003; but 59% in 2011. In addition, a survey for NatCen Social Research found that the proportion of Britons who think that less generous benefits would make people stand on their own two feet had doubled from 26% in 1991 to 54% now.

Simon Wilson’s first career was in book publishing, as an economics editor at Routledge, and as a publisher of non-fiction at Random House, specialising in popular business and management books. While there, he published Customers.com, a bestselling classic of the early days of e-commerce, and The Money or Your Life: Reuniting Work and Joy, an inspirational book that helped inspire its publisher towards a post-corporate, portfolio life.   

Since 2001, he has been a writer for MoneyWeek, a financial copywriter, and a long-time contributing editor at The Week. Simon also works as an actor and corporate trainer; current and past clients include investment banks, the Bank of England, the UK government, several Magic Circle law firms and all of the Big Four accountancy firms. He has a degree in languages (German and Spanish) and social and political sciences from the University of Cambridge.