George Osborne to slash social security payments by £46bn in next five years

George Osborne At Reception

George Osborne has unveiled plans to cut a cumulative £46bn in social security payments over the next five years, prompting critics to warn that there will be substantial increase in poverty and inequality.

The chancellor said the measures, which focus on cuts to tax credits and housing benefit, would put welfare spending on a sustainable footing and prevent abuse of the benefits system, while maintaining the principle that social security should always support elderly, vulnerable and disabled people.

Outlining his principles for welfare reform, Osborne said he regarded it as a principle of the benefits system that it “should not support lifestyles and rents that are not available to the taxpayers who pay for that system”. He said his goal was to move Britain “from a high welfare, high tax economy to a lower welfare, lower tax society”.

The most eye-catching cut in the budget was the limit on tax credit support to two children per family – a long-held policy aim of the work and pensions secretary, Iain Duncan Smith. The government said recipients of tax credits “should face the same financial choices about having children as those supporting themselves solely through work”. The cap will apply to any children born after April 2017.

Critics warned that the cuts would lead to an explosion in child poverty and homelessness, and plunge thousands of ill and disabled people into hardship. They said their impact would not be cancelled out by the new national living wage for the over 25s that will be worth £9 an hour in 2020.

Matthew Reed, the chief executive of the Children’s Society, called the budget a disaster for low-income working families. He said: “It fails to provide a route out of poverty for families that are already struggling to make ends meet. The chancellor may declare this a budget for working people, but the hard truth is, work still won’t pay for the poorest families.”

The Resolution Foundation thinktank estimated that although some middle earners would be net gainers from Osborne’s changes to welfare and the minimum wage, they would leave low earners, typically on £9.35 an hour, between £850 and £1,000 a year worse off.

The biggest single chunk of savings – amounting to £16bn between 2015 and 2020 – will be found from reductions to income thresholds in tax credits and work allowances, effectively reducing the amount of earnings households can keep before their benefit entitlements are reduced. A further £3.7bn will be found by increasing the rate at which a person forfeits tax credits as their earnings increase.

About £4bn a year will be saved through a four-year freeze to working-age benefits, including tax credits, unemployment benefit and housing benefit, starting in April 2016. However, some statutory payments such as maternity pay, and a number of disability benefits, including personal independence payments and the disability living allowance, will continue to rise by inflation.

The value of pensioner benefits were protected, including pensions, which at £86bn a year are by far the biggest single element of social security spending. Winter fuel allowances for pensioners and free TV licences for the over 75s are also ringfenced, with the latter to be paid for by the BBC progressively over the parliament.

Osborne also confirmed that the benefit cap, which limits the amount of benefits an out-of-work family can receive, will be lowered from £26,000 to £20,000, except in London, where the cap will be £23,000. About £800m of discretionary housing payments will be given to councils over the next five years to provide temporary respite from eviction and homelessness for the estimated 90,000 households who are expected to be capped. Osborne claimed the benefit cap had encouraged “tens of thousands” into work.

But the chancellor enraged disability charities by taking £1,500 a year off the employment and support allowance paid to claimants who are deemed temporarily unable to work because of illness or disability. Macmillan Cancer Support said the move would “leave thousands of people with cancer without a vital financial lifeline at a time when they need it most”.

The Treasury said working families would be better off under the changes. Its modelling shows that the combined impact of welfare cuts, changes to the personal tax allowance and the creation of the new national living wage would see a dual-earner renting family with two children, currently earning the national minimum wage, see their net income rise 12% over the parliament, while a single-earner couple with two children would experience at 3% increase.

However, the same Treasury estimates show that a household which falls out of work, or is unable to work but not exempt from the benefit cap, will see its resources diminish rapidly to critical levels. A jobless couple living outside London and hit by the benefit cap would suffer a 28% income fall by 2020.

Joanna Kennedy, the chief executive of the Z2K anti-poverty charity, said: “The net result of [the benefit cap] is certain to be an increase in homelessness and poverty.”

Shelter, the housing charity, said the benefit cap no longer applied just to expensive postcodes in London and the south-east but would now affect families in low-rent areas previously immune to it. Shelter’s chief executive, Campbell Robb, said: “We’re talking about places like Portsmouth and Southend being off-limits to families on low incomes.

“Imagine your partner dying or relationship breaking down, having two young children to care for on your own, and needing some help to get by: if you don’t have any savings you’ll either go without the basics or be forced to move town.”

Alison Garnham, the chief executive of the Child Poverty Action Group, said: “The welcome move on a higher minimum wage cannot disguise the truth that this is a budget which damages the economic security of working families and takes us further down the road to being a two-nation economy, with higher child poverty for millions and lower taxes for the better off.”

Andrew Harrop, the general secretary of the Fabian Society, said: “The chancellor described this as a budget for working people, but Wednesday’s announcement will lead to a big rise in child poverty and economic inequality.”

Powered by article was written by Patrick Butler Social policy editor, for The Guardian on Wednesday 8th July 2015 20.35 Europe/London © Guardian News and Media Limited 2010