Tax by tax, spend by spend

Welfare spending: jobseeker’s allowance

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. Jobseeker’s allowance (JSA) is one of the smaller elements of welfare spending and is one that has already been replaced to a significant extent by universal credit. It is an income replacement benefit providing support to those who are unemployed and actively seeking work. It was introduced in 1996, replacing unemployment benefit and the unemployment element of income support. The key driver of spending on JSA is therefore unemployment.

There are two types of JSA:

  • Income-based (or non-contributory) JSA is paid to claimants who satisfy a household-based income test which takes account of both earnings and capital; and
  • Contributory JSA is paid to individuals who have paid sufficient Class 1 National Insurance contributions in the two tax years prior to the date of claim.

Although small relative to other lines of spending, spending on JSA and its predecessors has historically been volatile, rising and falling with the ups and downs of the economic cycle.

Income-based JSA is one of the elements of welfare spending that is being replaced by universal credit over the coming years. Contributory JSA will continue as a separate benefit. Currently, we produce our forecasts for all 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 details how we forecast spending on UC and the legacy benefits.

In our latest forecast, overall outturn spending on JSA is estimated to be £1.7 billion in 2017-18, with around £0.9 billion of income-based JSA spending having been ‘lost’ to UC. We expect overall JSA spending in 2018-19 on a ‘no-UC’ counterfactual basis to total £2.5 billion, which would imply 0.7 million claimants being paid an average of around £3,830 each. That would represent 0.3 per cent of total public spending and 0.1 per cent of national income.

  • Recent trends

    The charts below show jobseeker’s allowance spending in both cash terms and as a share of national income (GDP). Spending measured in cash terms is a simple metric for analysing trends over time. But without putting the cash amount into context – by asking how much national income is devoted to different types of public spending – interpreting changes in cash spending is difficult, particularly over long time periods.

    Trends in spending as a share of GDP are useful to understand how spending moves in line with the underlying economic activity that ultimately finances it via taxation. In cash terms, both spending and GDP will tend to rise over time because of population growth and inflation. Spending as a share of GDP is the most relevant metric when considering the sustainability of the public finances.

    Chapter 8 of our October 2014 Welfare trends report described the trend in spending on unemployment benefits over the past 30 years:

    Spending on unemployment benefits accounted for as much as 1.4 per cent of GDP between the late-1980s and the mid-1990s. This was largely due to the higher levels of unemployment that followed the early-1980s recession and subsequent industrial restructuring, followed by the milder early-1990s recession. Spending then fell rapidly from 0.9 per cent of GDP in 1993-94 to 0.4 per cent of GDP in 1997-98. The late-2000s recession had a relatively mild impact on spending on the unemployed, with spending peaking at 0.3 per cent of GDP in 2009-10. This was partly because workers reduced their hours and accepted real wage cuts, cushioning the impact of the recession on unemployment. Tax credits also had an effect, reducing the relative attractiveness of JSA, particularly for those with an unemployed partner. As unemployment fell from 2012-13 onwards, spending on the unemployed fell back to 0.1 per cent of GDP in 2016-17.

    It also decomposed the contributions from different drivers of changes as a per cent of GDP in caseloads and average awards over selected periods:

    • 1986-87 to 1990-91: spending fell, driven by falling caseloads. This was due to policy interventions that increased conditionality for unemployment benefits claimants – such as the ‘Restart’ policy in 1986 – as well as a cyclical improvement in the economy.
    • 1990-91 to 1993-94: spending increased in response to higher levels of unemployment following the early-1990s recession.
    • 1993-94 to 2007-08: spending fell consistently from 1 per cent of GDP in 1993-94 to 0.1 per cent in 2007-08. This largely reflected falling caseloads which were driven by a string economic performance and an increase in sanctions and conditionality applied to claimants. Unemployment benefits also became less generous during this period as average earnings growth outpaced the measures of inflation used to uprate awards.
    • 2007-08 to 2012-13: the increase in caseloads caused by the late-2000s recession resulted in spending reaching 0.3 per cent of GDP in 2009-10 and remaining broadly stable at this level before declining as the economy recovered from 2012-13 onwards.

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  • Latest forecast

    JSA spending (on a no-UC counterfactual basis) is forecast to rise by 15.1 per cent in cash terms between 2018-19 and 2022-23. As this is close to our forecast for nominal GDP growth, this represents an increase of only 0.01 per cent of GDP. This is driven by an expected increase in the JSA caseload over the course of the forecast, reflecting both a modest rise in unemployment more broadly but also the transfer of some lone parents from income support to JSA.

     

    Our March 2018 forecast revised spending on JSA up by £0.2 billion in 2022-23 relative to our November forecast. On average over the whole forecast period, spending increased by £0.2 billion a year. This reflected a revised assumption about the level of the JSA caseload that is consistent

    Jobseeker’s allowance: Changes since previous forecast

    jsa

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  • Previous forecasts

    Given the cyclicality of JSA spending, many of our forecast revisions can be explained by changes in our judgements on the outlook for the economy, and specifically for unemployment. Having risen sharply in the late-2000s recession, unemployment did not start to fall until 2013 but then fell further and faster than we assumed in forecasts around that time. In more recent forecasts, the large drops in spending in 2016-17 and 2017-18 can be explained by the switch from the marginal cost presentation of universal credit and legacy benefit spending to an actual cost presentation. Abstracting from this change in accounting, unemployment has continued to edge lower but our JSA forecasts have been more stable and closer to outturn.

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  • Policy measures

    Since our first forecast in June 2010, the Coalition and Conservative governments have announced around [6] policy measures directly affecting our forecast for JSA spending. (Broader changes in the stance of fiscal policy will also have affected our JSA forecasts when we incorporate their effects on economic growth.) The original costings for these measures are contained in our policy measures database and were described briefly in the Treasury’s relevant Policy costings document. For measures announced since December 2014, the uncertainty ranking that we assigned to each is set out in a separate database. For those deemed ‘high’ or ‘very high’ uncertainty, the rationale for that ranking was set out in Annex A of the relevant Economic and fiscal outlook.

    Some of the larger measures include:

    • The extension of the lone parent obligation to parents of children aged 5 and above (June Budget 2010)
    • Working-age benefits uprating freeze (June Budget 2010)
    • Reducing awards to 90 per cent after 12 months for JSA claimants (June Budget 2010)

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