Osborne is in a fix. If he is determined on £12bn welfare cuts come what may, he has a choice: either at least part of the half of social security spending which is currently protected will have to be raided, or there will almost certainly have to be significant cuts in in-work benefits which would seriously undermine Cameron’s claim/fantasy to be champion of blue collar conservatism since such workers are heavily dependent on these benefits. Of the £220bn social security budget, State pensions take £92bn, universal pensioner benefits £2.8bn and child benefits £12.7bn. That leaves only 3 large sectors within that budget which are being targeted – tax credits, housing benefit, and disability benefits. All three are politically explosive.
Housing benefit accounts for £26bn and has been a colossal subsidy to private landlords as house prices have risen, pushing up rents. Although none of this benefit has gone to tenants, if housing benefit is now significantly cut but landlords do not correspondingly reduce their rents, tens and perhaps hundreds of thousands of private tenants will be forced out and have to move further afield, perhaps hundreds of miles, where rents are cheaper. It also means that numerous private landlords, who very largely support the Tories, may find that their properties are unlet.
Cutting disability benefits, now costing £21.6bn, would be a perilous area for the Tories. There is no public support for this (apart from some disability hatred oddballs who equate them with spongers), and the disability lobby is well organised and effective. The Disability Living Fund is already being transmuted into a much weaker and less effective alternative scheme, and any further significant cutbacks could turn out to be extremely provocative.
Chopping tax benefits, now worth £29.9bn, would be even more tricky. As the market level of wages has been pushed down over the last decade, tax credits have played a crucial role in incentivising people in low-income households to take on work which raises their income above benefit levels. Any significant reductions in in-work benefits not only change the balance of that equation in a very unhelpful way, but also badly undermine the narrative, however far-fetched, that the Tories are on the side of blue-collar workers.
The only other option available is a big cut in means-tested child tax credits, two-thirds of which go to people in work. The BBC recently reported that Osborne was considering pegging pack them back to 2003-4 levels. This would cut entitlements for some 3.7 million low-income families with children by an average of about £1,400 a year, or £27 a week. That would reduce public expenditure by £5bn, but a cut of this size to family budgets could well be politically explosive.