If the rumours are correct, the Treasury is considering a two-year freeze in working-age benefits. Those who have been following the debate surrounding the need for a further £10 billion from the welfare bill will not find this surprising. The most recent Government statement on the issue came in the Prime Minister’s welfare speech in June when he clearly laid out his unhappiness that benefits had been increased by 5.2 per cent last year, despite earnings only increasing by 2.5 per cent.
With this in mind, the rationale behind the freeze is twofold. Firstly, if benefits are rising faster than wages, the gap between what someone gets on benefits and what they might get in work is reducing and incentives to make the move into work are being reduced. This undermines the work that Iain Duncan Smith is undertaking to try to make work pay. Secondly, the savings are substantial. If benefits had been increased by 2.5 per cent last year, rather than 5.2 per cent, the benefits bill would be £5 billion lower.
In this sense, the policy seems sensible and, given recent results from the British Social Attitudes survey, it also seems to chime with public opinion on benefits: 62 per cent of people think that benefits are too high and discourage work. It seems that the mantra of being cruel to be kind has some resonance here.
This is a short-sighted view, however. A benefit freeze is neither a long-term solution nor is it going to tackle the problems in the welfare state. If the coalition is going back up the progress they have made with the introduction of the Work Programme, the existing cuts to the benefits bill and the imminent implementation of Universal Credit, they need to be more ambitious. If further cuts are necessary they need to be focussed on areas where current expenditure is being badly spent or on where reforms could increase employment.
The problem is that, on the former, the most obvious target would be universal — non-means — pensioner benefits like free bus passes and the winter fuel allowance. However, within the context of the coalition agreement commitments to protect these benefits, recent exchanges between Number 10, the Treasury and DWP have already highlighted that this is politically difficult.
This leaves the most potential in creating savings from areas that increase employment: if employment rises, the benefits bill goes down. Policy Exchange has highlighted many areas where this could be achieved.
Firstly, the conditions put on benefit claimants need to be strengthened to make sure they are doing all they can to find work and taking on the opportunities that become available. To see why, we just need to look to recent news stories about a newly opened KFC in Surrey who were trying to recruit 70 new staff. Despite 11,600 Jobseekers Allowance Claimants in the local area, the manager could not recruit enough staff locally and had to resort to providing transport from areas further afield to get the staff he needed. By asking more of claimants, movements into work would become quicker and the benefit bill would be reduced.
Secondly, the support available to jobseekers from Jobcentres needs to be fundamentally reformed. Building on reforms implemented in Australia that brought in the expertise of private and third-sector experts to deliver employment support could save billions of pounds in administration costs alone. This would also improve the often inadequate and poorly targeted support that claimants with real barriers to work receive. By doing so, employment could be increased and the benefits bill reduced.
Of course, the problem with these solutions is that they would not deliver an immediate fiscal impact for the Treasury (savings may take years to be realised) and they are also harder to explain to the public. However, the reforms would reduce benefit expenditure permanently, increase employment and improve the UK economy. For this reason, no matter what is decided about freezing benefits, the Coalition needs to be more ambitious and couple this with further reforms to the welfare system that promote work and improve support. This would take political strength, but the long-term gains are clear.
Matthew Oakley is head of economics and social policy at Policy Exchange