Social security – The shrinkage strategy


With the starting gun now fired for next month’s General Election, there will be widespread debate about public expenditure cuts – a near certainty given the colossal £167 billion projected public sector net borrowing (PSNB) deficit for 2009/10. Last year, the social security budget is expected to have cost £164 billion, along with a further £23 billion for the related Tax Credits.

Given Total Managed Expenditure (TME) of an estimated £643 billion for 2009/10, pre debt interest, it is clear that social security – the UK’s largest public sector programme – could yield very sizeable savings. Once the high cost of pension provision is stripped out, which – depending on the methodology used - accounts for around a third of the budget, cuts will probably be sought from the remainder of the social security programme.

Some commentators have advocated a ‘Route One’ approach by simply abolishing some benefits or by scaling back Child Benefit entitlements. The more scientific approach is to operate a top-down policy and specify a budget that must be met each year until 2014/15.

Of course, it is very difficult to forecast the precise costs of social security payments, especially with rising unemployment and uncertainty on take-up levels. But, in setting the annual budget, the relevant Secretary of State should be held responsible for delivering it.

The most sensible way of achieving savings is by imposing a shrinkage policy right across the budget – but with the pension element being exempt. If Incapacity Benefits were, for example, reduced by a modest 2% per year – and entitlement were limited to only the most deserving 97% of applicants – net savings of well over 3% should be generated annually from this component of the budget.

Apply this methodology across a social security programme costing c£100 billion per year, pre pension provision costs, and do you not achieve material savings?