Controlling Annually Managed Expenditure
Carl Emmerson
© Institute for Fiscal Studies
The outlook for total spending
£ billion (2013–14 prices)
800
Total public spending
AME
DEL
700
600
500
400
300
200
100
© Institute for Fiscal Studies
Note: DEL and AME figures from 2013–14 adjusted for changes for local government
funding for Business Rates Retention and Council Tax Benefit localisation.
2017–18
2016–17
2015–16
2014–15
2013–14
2012–13
2011–12
2010–11
2009–10
2008–09
2007–08
2006–07
2005–06
2004–05
2003–04
2002–03
2001–02
2000–01
1999–00
1998–99
0
Introducing Aimee
Annually Managed Expenditure
in 2013–14 (£350.7bn)
© Institute for Fiscal Studies
Source: Author’s calculations using data from DWP, HM Treasury and ONS.
Introducing Aimee
Annually Managed Expenditure
in 2013–14 (£350.7bn)
Social security:
£213.7bn
© Institute for Fiscal Studies
Note: Social security adjusted to include support for council tax benefit and
locally-financed expenditure adjusted for Non-Domestic Rates.
Source: Author’s calculations using data from DWP, HM Treasury and ONS.
Introducing Aimee
Annually Managed Expenditure
in 2013–14 (£350.7bn)
Social security:
pensioners,
£116.4bn
Social security:
working age,
£97.3bn
© Institute for Fiscal Studies
Note: Social security adjusted to include support for council tax benefit and
locally-financed expenditure adjusted for Non-Domestic Rates.
Source: Author’s calculations using data from DWP, HM Treasury and ONS.
Introducing Aimee
Annually Managed Expenditure
in 2013–14 (£350.7bn)
Social security:
state pensions,
£83.4bn
Social
security: other
pensioner,
£33.0bn
© Institute for Fiscal Studies
Note: Social security adjusted to include support for council tax benefit and
locally-financed expenditure adjusted for Non-Domestic Rates.
Source: Author’s calculations using data from DWP, HM Treasury and ONS.
Introducing Aimee
Annually Managed Expenditure
in 2013–14 (£350.7bn)
Other,
Public-service £44.5bn
pensions,
£11.3bn
Locallyfinanced
expenditure,
£31.7bn
Social security:
state pensions,
£83.4bn
Social
security: other
pensioner,
£33.0bn
Debt interest,
£49.5bn
Social security:
working age,
£97.3bn
© Institute for Fiscal Studies
Note: Social security adjusted to include support for council tax benefit and
locally-financed expenditure adjusted for Non-Domestic Rates.
Source: Author’s calculations using data from DWP, HM Treasury and ONS.
There she grows
Forecast real growth in AME and components
Real terms, 2013–14 = 100
140
120
AME
100
© Institute for Fiscal Studies
2017–18
2016–17
2015–16
2014–15
2013–14
2012–13
2011–12
2010–11
80
Note: Social security adjusted to include support for council tax benefit and
locally-financed expenditure adjusted for Non-Domestic Rates.
Source: Author’s calculations using data from DWP, HM Treasury and ONS.
There she grows
Forecast real growth in AME and components
Real terms, 2013–14 = 100
140
120
AME
Soc sec: pensioner
Soc sec: working age
100
© Institute for Fiscal Studies
2017–18
2016–17
2015–16
2014–15
2013–14
2012–13
2011–12
2010–11
80
Note: Social security adjusted to include support for council tax benefit and
locally-financed expenditure adjusted for Non-Domestic Rates.
Source: Author’s calculations using data from DWP, HM Treasury and ONS.
There she grows
Forecast real growth in AME and components
Real terms, 2013–14 = 100
140
AME
120
Locally-financed
spending
Soc sec: pensioner
100
Soc sec: working age
© Institute for Fiscal Studies
2017–18
2016–17
2015–16
2014–15
2013–14
2012–13
2011–12
2010–11
80
Note: Social security adjusted to include support for council tax benefit and
locally-financed expenditure adjusted for Non-Domestic Rates.
Source: Author’s calculations using data from DWP, HM Treasury and ONS.
There she grows
Forecast real growth in AME and components
Real terms, 2013–14 = 100
140
Other
AME
120
Locally-financed
spending
100
Soc sec: pensioner
Soc sec: working age
© Institute for Fiscal Studies
2017–18
2016–17
2015–16
2014–15
2013–14
2012–13
2011–12
2010–11
80
Note: Social security adjusted to include support for council tax benefit and
locally-financed expenditure adjusted for Non-Domestic Rates.
Source: Author’s calculations using data from DWP, HM Treasury and ONS.
There she grows (again)
Forecast real growth in AME and components
Real terms, 2013–14 = 100
140
Public-service pensions
Other
120
AME
Locally-financed
spending
Soc sec: pensioner
100
Soc sec: working age
© Institute for Fiscal Studies
2017–18
2016–17
2015–16
2014–15
2013–14
2012–13
2011–12
2010–11
80
Note: Social security adjusted to include support for council tax benefit and
locally-financed expenditure adjusted for Non-Domestic Rates.
Source: Author’s calculations using data from DWP, HM Treasury and ONS.
There she grows (again)
Forecast real growth in AME and components
Real terms, 2013–14 = 100
140
Public-service pensions
Debt interest
120
Other
AME
Locally-financed
spending
Soc sec: pensioner
100
Soc sec: working age
© Institute for Fiscal Studies
2017–18
2016–17
2015–16
2014–15
2013–14
2012–13
2011–12
2010–11
80
Note: Social security adjusted to include support for council tax benefit and
locally-financed expenditure adjusted for Non-Domestic Rates.
Source: Author’s calculations using data from DWP, HM Treasury and ONS.
Debt interest
Projected increase in debt interest spending from a permanent
ppt increase in gilt rates (from 2012)
10
7.5
£ billion
8
6.0
6
4.4
4
2.6
2
0.9
0
2012–13
2013–14
2014–15
2015–16
2016–17
© Institute for Fiscal Studies
Source: Table 3.1 of OBR (2012), How we present uncertainty, Briefing Note No. 4.
Capping social security
• Budget 2014 to set a cash cap for “welfare in scope” spending in
2015–16, 2016–17, 2017–18 and 2018–19
– subsequent Budgets each to announce cap for one further year
• Cap to cover total spending on social security and tax credits less
– spending on state pension as over the longer-term this is to be
controlled via increases in the state pension age
– spending on jobseeker’s allowance (JSA) & some passported benefits as
these are the most cyclical
• If OBR projects spending to exceed the cap by a certain margin then
either have to implement cuts to bring projected spend below the
cap or announce that the cap is to be breached
• Idea is to force active decisions on whether or not to accommodate
welfare spending that is projected to be higher than previously
deemed desirable
© Institute for Fiscal Studies
Unmanaged expenditure example 1?
Real spending on incapacity benefit and predecessors
18
16
14
£ billion
12
10
8
6
54% increase in spending in 4 years
from 1989–90 to 1993–94
53% increase in claimants and 1%
increase in spending per claimant
4
2
1979–80
1980–81
1981–82
1982–83
1983–84
1984–85
1985–86
1986–87
1987–88
1988–89
1989–90
1990–91
1991–92
1992–93
1993–94
1994–95
1995–96
1996–97
1997–98
1998–99
1999–2000
2000–01
2001–02
2002–03
2003–04
2004–05
2005–06
2006–07
2007–08
0
© Institute for Fiscal Studies
Notes: Deflated to 2013–14 prices using GDP deflator.
Source: DWP benefit expenditure tables.
Unmanaged expenditure example 2?
Real spending on housing benefit
18
16
14
£ billion
12
10
8
6
82% increase in spending in 4 years
from 1989–90 to 1993–94
18% increase in claimants and 54%
increase in spending per claimant
4
2
1979–80
1980–81
1981–82
1982–83
1983–84
1984–85
1985–86
1986–87
1987–88
1988–89
1989–90
1990–91
1991–92
1992–93
1993–94
1994–95
1995–96
1996–97
1997–98
1998–99
1999–2000
2000–01
2001–02
2002–03
2003–04
2004–05
2005–06
2006–07
2007–08
0
© Institute for Fiscal Studies
Notes: Deflated to 2013–14 prices using GDP deflator.
Source: DWP benefit expenditure tables.
Would the cap have fitted since 2010?
Total benefit and tax credit spending excluding state pension and JSA
£ billion
125
120
115
110
£1.8bn increase in spending, could have led to breach of cap
and/or further welfare cuts than have been announced?
105
Autumn 2010 forecast
Budget 2013 forecast
© Institute for Fiscal Studies
2017–18
2016–17
2015–16
2014–15
2013–14
2012–13
2011–12
2010–11
2009–10
100
Capping social security
• If welfare spending has been allowed to rise undesirably then forcing
an active decision could lead to better policy making
• Could be good reasons to want to breach a cap
– economic downturn (much of capped spending still cyclical)
– above-expected inflation associated with higher private incomes
– deliberate increases in generosity of benefits/tax credits
• If a cap is a good thing then why not announce one now (or this
autumn) for 2014–15, 2015–16, 2016–17 and 2017–18?
– is this to avoid action being taken before the general election?
• Better to review all spending frequently regardless of whether higher
or lower than forecast, or at least cap individual components
– why no need to review if one component rises while another falls?
• Is enshrining cap in law the best use of parliamentary time?
© Institute for Fiscal Studies
Change to annual uprating of social rents
• “CPI + 1ppt”, not “RPI + 0.5ppts”, between 2015–16 and 2024–25
– 3% cut in social rents (~£2.70 p/w, on average) by April 2018
– OBR projections suggest social rents to rise by ~1ppt less per year thereafter
• Impact on social tenants:
– 2.6m on Housing Benefit (HB) unaffected
– 1.6m not on HB gain in full
– 0.7m million gain partially (‘under-occupying’ working-age tenants on HB):
4 in 5 of them keep 14% of the rent cut; 1 in 5 keep 25%
• Reduces income of local authorities / Housing Associations
– back-of the-envelope calculation based on official costing suggests £600m
less rent in 2017–18 of which £400m goes to central government (via
reduced HB) and £200m to tenants
– Treasury assumes policy will reduce investment in social housing
© Institute for Fiscal Studies
Part-funding councils to freeze council tax
• Part-funding a freeze in England in 2014–15 and 2015–16
– offer is extra grant equivalent to 1% of council tax, for 2 years only
• Average bill in England is £1,045
– by 2015–16 would rise to £1,098 if increased with CPI inflation
– so average real saving to households is £53 if local authorities do freeze
– rich gain most in cash terms, poor gain most as % of income
• The latest of several freezes
– council tax rates in England 9% lower than if risen with CPI since 2010
– nothing similar in Wales
– but council tax in Scotland has been frozen since 2007–08
• Relative to CPI uprating since 2010–11 revenues £3bn to £4bn lower
as a result of council tax freezes by 2015–16
– actual figure depends on take-up of latest freeze
© Institute for Fiscal Studies
Council tax as % of total revenue
Actual
6%
5%
Simple extrapolation
4%
If none freezes, all
follow OBR
assumption
If 60% freeze, 40%
follow OBR
assumption
If all in England
freeze
3%
2%
1%
1993–94
1994–95
1995–96
1996–97
1997–98
1998–99
1999–00
2000–01
2001–02
2002–03
2003–04
2004–05
2005–06
2006–07
2007–08
2008–09
2009–10
2010–11
2011–12
2012–13
2013–14
2014–15
2015–16
0%
© Institute for Fiscal Studies
Conclusions
• Forecast rise in Annually Managed Expenditure offsetting planned
cuts to departmental budgets
– strong growth in spending on debt interest and public service pensions
• If welfare spending has been allowed to rise undesirably then
forcing an active decision could lead to better policy making
– if so why not announce cap now for years to 2017–18?
– better to review all spending frequently regardless of whether higher
or lower than forecast, or at least cap individual components
• Lower social rents to benefit some tenants and reduce housing
benefit bill
– at the expense of local authorities and Housing Associations
© Institute for Fiscal Studies