The Treasury will breach its self-imposed welfare cap by £20bn over the duration of the current parliament following the U-turn on disability benefits, the government’s spending watchdog has confirmed.
The Office for Budget Responsibility (OBR) said the reversal of a cut in personal independence payments (PIPs)would add another £1.3bn a year to a welfare budget that was already £2.7bn over a limit set by George Osborne before the general election last May.
Speaking to MPs on the Treasury select committee, the OBR chairman, Robert Chote, said the move would increase the deficit but would not prevent the chancellor from delivering a budget surplus in the year before the next general election.
The welfare cap is one of three targets set by Osborne to measure the success of his economic management. The OBR confirmed before the budget last week that the chancellor would miss his target of reducing the deficit in every year of the parliament.
It also said the welfare cap would be breached in every year under the current projections for the government’s finances. But Osborne remains on target to create a surplus in five years, achieving his third target. However, as a result of the PIP U-turn, it might not be as large as the £10m indicated in the government’s projections.
Chote said there was still a 55% chance of the budget surplus being achieved. He also denied that a cut in migration after a possible exit from the EU would throw the chancellor off course.
The OBR’s forecasts are based on net migration of 900,000 over the duration of the parliament, which is based on a long-run average forecast by the Office for National Statistics rather than recent experience, which shows net migration hitting 330,000 in the past year.
Chote said he used three estimates for migration – high, medium, and low. A lower than expected total would cut the surplus in 2020 by £4.5bn, which is less than the £10.2bn surplus expected under the current plans.
Labour MP Rachel Reeves said she was concerned that the OBR’s forecasts were based on an estimate of the savings rate that has been proved to be overoptimistic in successive budgets, and also on an increase in household debt to fuel consumer spending and GDP growth.
Tory MP Mark Garnier said the cocktail of rising household indebtedness while non-pension savings fall and house prices rise “had a whiff of the financial crisis about it”.
Sir Stephen Nickell, the OBR’s main economic adviser, said rising debts were offset by rising asset prices, which meant the household balance sheet “is in an unprecedented healthy state in terms of the ratio of assets to liabilities”. The ratio of assets to household borrowing is expected to hit 825% in the current OBR forecast, up from 800% in last year’s forecast.
But undeterred, Garnier said: “If you take out pensions, you have negative savings by 2020. So isn’t it worrying that more household debt and higher property prices are needed to keep the economy going? We are asking already highly stressed households to keep spending at a time when they might also need to pay higher interest rates.”
Chote argued that if higher interest rates were connected with an improving economy, then it could boost household incomes and their capacity to pay more expensive loan costs. But if the trigger for increasing interest rates came from a steep fall in the pound, which the Bank of England sought to stabilise through higher rates, then it would have a negative impact.
Nickell added: “If there was a sharp rise in interest rates brought about by something unrelated to improved economic growth – going up to 5% in the space of a year – that would slow the economy and may push it into recession.”
