The Treasury manages public spending within two ‘control totals’ of about equal size:
- departmental expenditure limits (DELs) – mostly covering spending on public services, grants and administration (collectively termed ‘resource’ spending) and investment (‘capital’ spending). These are items that can be planned over extended periods.
- annually managed expenditure (AME) – categories of spending less amenable to multi-year planning, such as social security spending and debt interest.
Social security and tax credits together are the biggest source of AME spending. Tax credits are one of the bigger elements of welfare spending (making up just over 10 per cent of the total). They comprise the working tax credit – payable to families with someone in work (typically for 16 hours or more a week) – and the much larger child tax credit – payable to families with children. The working tax credit also subsidises childcare costs. Awards are based on family circumstances and means-tested against family income.
Key determinants of spending on tax credits are household composition, employment/unemployment, and earnings. Tax credits are one of the elements of welfare spending that will be replaced by universal credit (UC) over the coming years. Currently, we produce our forecasts for all of the benefits affected by UC by first assuming a no-UC counterfactual (i.e. the legacy benefits continue as before) then adding the marginal cost of introducing UC. In outturn years, in order to enable monitoring of monthly spending against our forecasts, we switch to an ‘actual cost’ presentation of spending showing legacy benefit spending net of the impact of the UC rollout. These accounting switches appear as line breaks between the last actual cost and first no-UC counterfactual data points in the charts below. Our January 2018 Welfare trends report sets out how we forecast spending on UC and the legacy benefits in more detail.
In our latest forecast, outturn spending on tax credits is estimated to be £25.8 billion in 2017-18, with around £0.6 billion of spending having been ‘lost’ to UC. We expect tax credits spending in 2018-19 to total £26.0 billion (on a ‘no-UC’ counterfactual basis), with 3.6 million recipients paid an average of £7,170 each. That would represent around 3.2 per cent of total public spending and 1.2 per cent of national income.