Politics trumps fiscal principle in the case of universal benefits

By Peter Hoskin
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Forget the Lords for a second — perhaps the most significant bit of political news to emerge yesterday was David Cameron's reaffirmed support for universal benefits. Speaking in PMQs, he rejected Nick Boles's proposals for curtailing certain pension-age handouts, saying that, “at the last election I made a very clear promise about bus passes, about television licences, about winter fuel payments. We are keeping all those promises.” And then Downing Street made the Prime Minister’s meaning even clearer, suggesting that this promise would continue past the next election.

This is smart politics from the Prime Minister, you might say. After all, why alienate those better-off pensioners who might be inclined to vote Conservative? But I’d say that there’s a very important reason to take that risk: namely, the state of the public finances.

It’s not just the couple of £billion that might be saved were these benefits to become means-tested — it’s the principle. As I said a couple of days ago, I’ve never quite understood a system whereby the state taxes and borrows money; siphons it through various money-eating Treasury computer systems; and then gives some of it back to people who don’t actually need it, or would probably prefer to be taxed less in the first place. But I certainly don’t understand why that system should be preserved through the bad times. If we’ve all got to get used to a smaller state — as even Labour politicians admit — then surely this sort of benefits sprawl is an ideal candidate for reassessment. The welfare state was never intended to fund people’s Christmas shopping (which is what, I know, some people spend their Winter Fuel Allowance on); so why not go back to first principles here?

Of course, money can be cut from the separate departmental budgets — that’s always the case. But benefit cuts (and tax hikes) are much easier money for the Exchequer, simply because they can be relied upon. You cut certain benefits or increase certain taxes, and (allowing for dynamic effects) you can be fairly sure about the amount of money that will be raised. Whereas departmental spending cuts are often little more than aspirations. No Chancellor, when he sets out cuts for government departments, can be entirely sure they will be implemented. And, even if they are, they can sometimes take years to percolate through Whitehall’s consciousness and on to its spreadsheets.

This, I imagine, is why both George Osborne and Nick Boles are mooting a further £10.5 billion of welfare cuts for after the election — a figure which, according to an analysis by the Institute for Fiscal Studies, would keep overall departmental spending cuts on a similar trajectory to now. But if those welfare cuts aren’t going to be made to universal benefits, where will they fall? There’s (much-needed) housing benefit reform, I suppose, but that can hardly be done at the stroke of a Chancellor’s calculator. And, remember, Mr Osborne is currently planning to have the structural deficit eradicated only two years after 2015.

In any case, it’s supremely important that the next Spending Review, pencilled in for next year, isn’t delayed. Whether it’s departmental spending cuts or housing benefit reforms, the Coalition needs to start talking detail as soon as possible, lest their deficit reduction plan slip even further. It’s just a shame that Mr Cameron has begun this post-2015 fiscal process by rejecting one of the “tough decisions” that — both fiscally and morally, if not politically — should actually have been one of the easiest.