Monitoring the Performance of the Department for Work and Pensions in 2012-13 - Work and Pensions Committee Contents


2  Welfare spending trends and reductions

Spending trends

6. The DWP Annual Report and Accounts 2012-13 shows that overall welfare expenditure continues to rise.
DWP total welfare/ pension spending

(£ billion)


2008-09

2009-10

2010-11

2011-12

2012-13

2013-14 forecast

2014-15 forecast

2015-16 forecast
Cash terms131.2 141.9146.5 154.4160.6 163.7167.2 171.3
Adjusted (2008/09 prices) 131.2138.1 139.0143.2 146.3146.2 146.3147.6

The trends in expenditure across the range of benefits and pensions paid by the Department are shown in the tables below.

Table 1: DWP cash spending (not adjusted for inflation) (£ billion)      


Table 2: Share of total welfare spending (%)

Source: DWP Annual Report and Accounts 2012-13, Annex 1 expenditure tables (core tables): Table 1: Public spending. Figures in the table and graphs show the Annually Managed Expenditure items from this table (pp 168-169)

The key indications are that:

·  cash spending on welfare continues to rise, from £131 billion in 2008-09 and £146 billion in 2010-11 to a projected £171 billion in 2015-16.

·  In real terms welfare spending is projected to stabilise and then to rise slightly by 2015-16. [4]

·  The share of DWP's total welfare spending on:

—  pensioners continues to rise (despite increases in state pension age) with the growth in population and longevity rates, and constitutes well over 50% of total expenditure;

—  people of working age is projected to fall to under 20% by 2015-16;

—  people with disabilities is rising slightly to just over 20% by 2015-16.

However, DWP believes that welfare spending as a percentage of GDP is now falling, as the economy starts to grow. [5]

Welfare spending reductions

7. The Government says that its 2010 reforms will have achieved savings of £50 billion in the welfare budget by the end of this Parliament in 2015, half of which will have been saved by the end of the current financial year (2013-14). The Government aims to save a further £18 billion in financial year 2014-15.[6]

8. The Permanent Secretary told us that the key elements in these savings were: the 1% limit on benefits up-rating; time-limiting of contributory Employment and Support Allowance (ESA); and housing benefit reforms.[7] (Benefits up-rating is discussed below. We have explored the impact of reform of support for housing costs in detail in a separate inquiry. We have begun a new inquiry into ESA).

Benefits up-rating

9. As highlighted by DWP, one of the main elements contributing to the reduction in welfare expenditure achieved in 2013-14 is the Government's decision to limit benefit up-rating to 1% for three years from April 2013 (excluding State Pensions), rather than it being linked to a measure of inflation. The Department estimated that this would save £246 million in 2013-14 (DWP benefits only).[8] The Government's rationale is that it is fairer to link benefits up-rating more closely to wage inflation. In the 2012 Autumn Statement the Chancellor said:

    [...] average earnings have risen by about 10% since 2007. Out-of-work benefits have gone up by about 20%. That is not fair to working people who pay the taxes that fund them. Those working in the public services, who have seen their basic pay frozen, will now see it rise by an average of 1%. A similar approach of a 1% rise should apply to those in receipt of benefits. That is fair and it will ensure that we have a welfare system that Britain can afford.[9]

10. ONS figures show that:

·  for most months during 2013 average rises in total pay hovered around 1%.[10]

·  From 2008 to 2012—with inflation generally higher than wage rises—benefit up-ratings, based on inflation, were generally higher than average rises in total pay.

·  Inflation has recently fallen to the lowest level for some time, to 2%.[11]

For the remaining period of the 1% benefits up-rating, there is uncertainty as to the future likely growth in wages.

11. Although there is a logic to linking increases in benefit rates to wage inflation, the potential impact on benefit claimants needs to be borne in mind. Expenditure on essentials such as rent, heating and food is generally thought to be higher for people on low incomes. The proportional impact of price rises can therefore vary according to income. The Institute for Fiscal Studies (IFS) produced a report in 2011 showing that the poorest fifth of households faced an average annual inflation rate of 4.3% between 2008 and 2010, whilst the richest fifth experienced a rate of just 2.7% a year over the same period.[12]

12. We asked the Secretary of State what assessment the Department had carried out of the impact that the limit on up-rating had had so far on claimants. He said that "the evidence we get is that people are by and large managing" and he highlighted that local welfare assistance schemes were in place to provide support for claimants who were facing hardship.[13] We discuss local welfare assistance provision below.

13. Studies have shown that people on low incomes spend a higher proportion of income on rent, heating and food, which are often subject to higher inflation rates than general expenditure. The average annual rate of inflation that the poorest people face may therefore be significantly higher than that incurred by wealthier people. This may mean that people on benefits are likely to be hard hit by a 1% limit on benefit up-rating. We recommend that the Government monitor the impact of this reform on benefit claimants, particularly as many of them may also be affected by other reforms, including those to housing benefit, the introduction of the benefit cap, and changes in entitlement to disability benefits.


4   Adjusted using actual and projected GDP deflator series (at market prices percentage change on last year). See HM Treasury, GDP deflators at market prices, and money GDP, December 2013. Figures for 2013-14 to 2015-16 are taken from the OBR's figures in the Autumn Statement 2013,, Table B.2 ,p 111 Back

5   DWP Mid Year Report to Parliament, April to September 2013, 23 January 2014, Executive Summary Back

6   HM Treasury Autumn Statement 2013, , December 2013, Cm 8747, para 1.96 Back

7   Oral evidence taken on 3 February 2014, HC 867, Q242; see also HM Treasury, Spending Round 2013, June 2013, Cm 8639, Executive Summary, p 7 Back

8   DWP written evidence: response to questions from the Committee on the Main Supply Estimate 2013-14  Back

9   HC Deb, 5 December 2012, col 879  Back

10   ONS, Labour market statistics, January 2014, p 4 (refers to annual growth of 0.9% in average weekly earnings) Back

11   ONS, Labour market statistics, December 2013  Back

12   Institute for Fiscal Studies, The spending patterns and inflation experience of low-income households over the past decade, June 2011. Inflation figures taken from ONS average weekly earnings data, Labour market statistics, December 2013  Back

13   Oral evidence taken on 3 February 2014, HC 867, Q245 Back


 
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Prepared 18 March 2014