Audit Office and the Welfare Cap

The welfare cap is encouraging a greater understanding of spending across government, according to the National Audit Office, but it is important that processes for managing the cap are reliable.

The cap, introduced in 2014, has increased departments’ oversight of spending on benefits and tax credits. Since the spending is largely determined by individual entitlements, departments are not able to exercise in-year control in the way the might for other areas of spending. The level of attention to spending forecasts has increased across government and at the Office for Budget Responsibility (OBR).

Processes for managing the cap are evolving. Performance against the cap is assessed by the OBR at each autumn statement. The OBR announced last year that the cap was breached owing to the government’s decision to reverse some of its proposed reforms to tax credits. Failing to account correctly for the impact of tax credit reforms on other benefits led to an error at Summer Budget 2015.

The government has chosen to exclude the State Pension, as well as spending which is highly dependent on the state of the economy, including Jobseeker’s Allowance and related Housing Benefit payments. This reduces the level of uncertainty around unemployment assumptions in forecasts. According to the NAO, however, there is a risk that the current scope of the cap may create an incentive for government to keep claimants on Jobseeker’s Allowance instead of encouraging claimants into work and increasing entitlement to in-work benefits.

Today’s report found that while the cap builds on well-established forecasts of social security and tax credit spending, there are several areas in which analysis and forecasts could be improved. Interactions between benefits, for example, are not dealt with systematically. At the moment DWP’s forecasts are developed for individual benefit streams with separate manual adjustments to account for interactions between benefits. In addition, there is not always time for the OBR to fully review all elements of the forecasts – and in particular the Government’s policy costings – given the complicated reporting environment.

The NAO recommends that HM Treasury should better support the OBR by increasing access to departmental experts and increasing the time that the OBR has to consider the impacts of new policies; that departments should improve some aspects of their modelling of future benefit spending; and that HM Treasury should set out clearer cross-departmental arrangements as plans for benefit spending at one department often affect spending in another department.

Amyas Morse, head of the National Audit Office, said today:

“Forecasts will always be uncertain but when spending is projected to be close to or over the cap, weaknesses in forecasts may affect policy or operational decisions.

“All departments involved should therefore move quickly to improve their processes.”

Key facts

About the welfare cap

1. The current cap was set at the Summer Budget 2015 for a rolling five-year period: in 2016-17 it is £115.2 billion falling to £114.9bn in 2020-21.
2. The welfare cap covers most social security spending apart from the State Pension, Jobseeker’s Allowance and Housing Benefit for jobseekers (and equivalent payments under Universal Credit).
3. The welfare cap should not be confused with the household benefit cap, which limits the amount of benefit a non-working household can receive each week.