How to fill the PIP hole?

Now what?

The Government has signalled an embarrassing (not to mention expensive) u-turn, reversing its cuts to Personal Independence Payments – the disability benefit scheme. Leaving aside the enormous political questions for the time being, how on earth will it afford it?

We have been told today that we won’t get the answer from the Chancellor until his Autumn Statement in the winter, but we can do a bit of back of an envelope arithmetic to work out his options.

The PIP cuts were due to save the Government a projected £1.3bn by 2019/20 (£4.3bn over the course of the next five years, but when you’re looking at fiscal projections it generally makes most sense to focus on a given year).

So the question is what could the Chancellor do to make up the £1.3bn hole in his books? A quick look at the scorecard in in the latest Budget (page 87 onwards in this pdf of the Red Book)

1. Cut DEL further

Option one, the easiest to plug into your books, if not to impose, would be to impose further cuts on government departments. They are already due to take a £3.5bn cut in 2019/20. Perhaps you could increase that to £4.8bn. Raises: £1.3bn

Pros: easy to plug into the scorecard, most voters still believe government is too fat.

Cons: Would be difficult to impose earlier than 2019/20 and the PIP cuts are due to kick in sooner, so wouldn’t entirely fill the hole.

2. Cancel some of the Budget 2016 giveaways

After all, the Budget contained some generous gifts for (richer) taxpayers. Reversing some of them could not just fill the fiscal hole but might underline the Government’s one nation credentials. For instance:

a) Ditch the increases in small business rates relief. Raises: £1.42bn

After all, while these may look like tax breaks for small businesses, in reality most of the benefits accrue to the landowners who own the shops and premises on which business rates are paid.

b) Can the CGT cut from 28% to 20% (cost: £670m) and the increase in the higher rate tax threshold to £45k (cost: £565m). Total raised: £1.24bn

These two tax cuts were seen as primarily benefiting wealthier taxpayers. Reversing them would at least bespeak an attempt to tackle inequality

c) Cancel the freeze in fuel duty (cost: £445m) and raise duty by a further 3% (raises: £795m). Total raised: £1.24bn

Given petrol prices are still so low, and that the cost of driving is lower than it has been for two decades, and that most environmental groups think fuel duty should be higher, this move might be less painful than it seems at first. Then again, fellow Tory MPs would be livid, which is inconvenient ahead of the referendum. But less so in the autumn when the referendum has been and gone.

3. Do nothing

This might seem like the least likely option, but might also be the smartest. For the fact is that even if the Chancellor is still determined to meet his silly surplus rule (the one that stipulates he has to generate more taxes than he spends by 2019/20), he still has £10.4bn of leeway. That, after all, is the size of the surplus he’s planning to bring in that year. So subtracting the savings from the PIP cuts from that would still leave Mr Osborne with a £9.1bn surplus, which is quite enough to meet the rule. Anyway, most economists would argue that the rule shouldn’t be guiding policy anyway.

Of course, Mr Osborne would face breaking his other rule, the welfare cap, and his debt rule (which says the national debt needs to fall every year), but he’s already broken them already, so who cares if he continues to break them for a few more years. And while he would also probably fail to make the much-vaunted £12bn of welfare cuts promised at the election, this promise looks increasingly like less of a vote-winner and more of a liability.

PS On the broader question of fairness, and whether the government’s Budgets have had enough of it, this blog from the IFS is worth reading. And on the basis that they haven’t yet made their charts interactive, here is the distributional impact of the coalition government’s policies:

And here is the impact of the current and planned policies imposed by the majority Conservative government: