UK welfare spending cap plans hit by rising housing and incapacity benefit bills

The government’s plans to cap welfare spending are under pressure from rising housing and incapacity benefit bills, according to Whitehall’s budget watchdog.

Welfare reforms have hit unforeseen barriers, the Office for Budget Responsibility (OBR) said, with an overhaul of incapacity benefit failing to produce the forecast steep falls in the overall bill, while a switch from public to private rented housing had pushed up the costs of housing benefit, which is mostly claimed by workers on low wages.

Spending on incapacity benefit is now forecast to remain flat for the next five years while a continuation of the trend in housing benefit will drive up the £20bn spent subsidising low-income workers’ rent payments.

A switch to a new system of assessing disability benefits, already much delayed, could also result in few savings, judging by past efforts at reform, OBR chairman Robert Chote said.

The OBR also warned that the public finances are suffering despite the recovery as workers take low-paid jobs so pay correspondingly little tax and corporations offset losses during the crash against current profits.

The warning follows the OBR’s assessment earlier this week that income tax receipts will be depressed this year after the recovery had failed to translate into higher tax receipts.

A larger number of workers taking low-paid jobs, especially among the self-employed, is likely to drag down the amount of income tax going to the exchequer in 2014/2015.

A boost to income tax receipts from highly paid employees is still expected to bolster the government’s finances after many avoided the 50p tax rate by deciding to delay gains to the current year when the new 45p rate applies.

The welfare report also highlighted the growing cost of providing pension benefits and tax relief for pension savers.

The proportion of welfare spending on the state pension will rise from 46% last year to 52.2%in 2033.

The current level of subsidy for pension saving is £34bn, the report said.

Powered by article was written by Phillip Inman, economics correspondent, for The Guardian on Thursday 16th October 2014 13.35 Europe/London © Guardian News and Media Limited 2010