UK chancellor Rachel Reeves would save £1bn a year by 2029 by freezing health-related benefits, according to analysis that underlines the difficulty of finding big savings from welfare to fill a hole in the public finances.
The analysis by the Resolution Foundation think-tank, published on Thursday, sets out ways to cut the benefits bill in the short term, after Reeves’ £9.9bn of fiscal headroom was wiped out by higher borrowing costs and slow growth.
Freezing means-tested incapacity benefits, paid to people who are assessed as unable to work or job hunt because of their health, would save £1bn by 2029 and would be “the least bad option”, said Louise Murphy, Resolution Foundation senior economist.
This would spread the pain across a large group and would also lessen the stark incentives for people to claim incapacity benefits in preference to the lower rate of jobless benefits.
Treasury insiders said Reeves is also looking to further crack down on error and fraud in the welfare system in her drive to close a fiscal gap of at least £10bn.
The chancellor was also targeting efficiency savings in the civil service, obstructive regulation and NHS productivity, Reeves’ allies said. The UK’s recent commitment to raise defence spending has added further pressure on the public finances.
Reeves will set out her plans to the Office for Budget Responsibility in the coming days ahead of her March 26 statement and is considering measures which the independent fiscal watchdog will “score” in its official forecast.
The government is preparing to publish welfare reforms in a green paper close to the Spring Statement.
Cutting or freezing benefit rates or restricting eligibility criteria are the most obvious ways to convince the OBR that substantial savings will be realised in the short term.
But ministers at the Department for Work and Pensions are fighting to convince the watchdog that long-term savings would also flow from stepping up back-to-work support.
In a sign of these ambitions, the government announced on Thursday that it would deploy 1,000 work coaches to deliver support to help about 65,000 sick and disabled people into employment.
State spending on incapacity and disability benefits has risen sharply in recent years. Experts say this has been largely driven by ill health and skewed incentives in the welfare system that have pushed people towards claiming support that offers higher entitlements.
Murphy said the only realistic way to make substantial savings within the OBR’s five-year forecast horizon was to cut the real-terms value of benefits payments to existing, as well as new, claimants.
The government could also consider cutting or time limiting the level of support some people receive in disability benefits, the report said.
The Resolution Foundation said the government could save £600mn a year if it could restore the number of people coming off health-related benefits to 2012 levels by offering better back-to-work support.
Paul Johnson, head of the Institute for Fiscal Studies, argues that freezing various personal tax thresholds would be the simplest way for Reeves to fill her fiscal hole, saving about £10bn in 2029-2030.
In a separate report, the IFS warned on Thursday that the government was on track to borrow £143bn in the current fiscal year, £16bn above the October forecast, underscoring the weak state of the public finances.
Cutting planned day-to-day spending by £10bn in 2029-2030 would imply real-terms departmental spending growth of 0.9 per cent a year, sharply below the 1.3 per cent previously expected, the IFS estimated.