Caroline Elsom: Hidden benefits are breaking our welfare system and proving there’s ‘no such thing as a free lunch’

Caroline Elsom is Head of Government Reform at Onward.

The catastrophic cost of Britain’s benefits bill is no secret. But the already eyewatering sums are usually missing a crucial part of the welfare system – all of the extra payments, discounts and freebies that claimants can receive on top of their regular benefits.

Many of these schemes, known as passported benefits, will be familiar to readers, like free school meals, free prescriptions or council tax reduction for those on certain benefits. Few will be aware of just how many different extras are now on offer, covering everything from broadband contracts to court fee remission. At least 20 different schemes are topping up the incomes of those already receiving tens of thousands each year from the state in benefit payments that are intended to have already covered their essential living costs.

In my new report for Onward think tank, The Hidden Benefits Bill, I reveal the true cost of all these passported benefits: over £10 billion. The rollout of Universal Credit, which was meant to do away with the need for all these piecemeal legacy schemes, has dragged on so long that new schemes have now been added and existing ones enlarged.

It is no coincidence that the two major passported benefits that the Labour Government has decided to expand this year are free school meals and the Warm Home Discount. They are some of the only passported schemes that are measured in poverty statistics as additional effective income, while almost all others go uncounted. By bringing more people into these schemes, they can claim to have lowered poverty despite the changes poorly targeting those most in need.

From this year, the Warm Home Discount will automatically apply a flat £150 rebate to the energy bills of all households on Universal Credit, regardless of how energy efficient or low usage their home is. Likewise, expanding free school is set to cause chaos for school and local authority funding which uses free school meals as a marker of deprivation for the National Funding Formula, the Pupil Premium, eligibility for the Holiday Activities and Food Programme and extended rights to free home-to-school transport.

With the end of the rollout of Universal Credit finally in sight this Parliament, now is precisely the time that the Government should be looking to rationalise these schemes, not adding to them further. Instead, the Labour Government has ruled out any new welfare legislation for at least the next year following the disability benefit reform debacle. The bill to taxpayers and consumers will only grow further as a result.

Some would argue that £10 billion is a price worth paying for targeted support schemes – that it’s the cost of a civilised society that takes care of its most vulnerable. If only it were actually the case that these fragmented schemes were improving outcomes. Broadband social tariffs are often giving claimants worse deals than regular switching. Bursary cash for disadvantaged teens that makes them worse off in the long run, missing out on vital early experiences of the workplace. Special savings accounts that are driving claimants to hold out for top-ups while falling further into debt. Online forums that discuss using Healthy Start grocery cards to buy alcohol and vapes.

Worse still, the cumulative effect on some families of being able to claim thousands, sometimes more than £10,000 in additional support while on Universal Credit, is that they face a steep cliff edge if they try to come off benefits. The impact of already high marginal effective tax rates for many claimants due to the taper rate and income tax is compounded by the withdrawal of passported benefits, leaving claimants questioning whether they are really better off working more – or working at all.

In the clamour to look caring by carving out all these special schemes, it has become harder for claimants to manage their finances as a whole, with an entirely different set of household budgeting dynamics to those just beyond the benefits system. At the same time, many are left missing out on extra support they may be eligible for because they are simply unaware or unable to navigate the associated bureaucracy.

There is no easy way out of this mess without politically difficult trade-offs to radically rationalise the system. My report goes through each scheme in turn to propose an alternative way to deliver support, consolidating most into Universal Credit payments, alongside a single scheme for one-off unavoidable or unforeseeable costs and a lower taper rate for those working their way to financial independence from the state.

These changes are not about ripping up the Conservative record on welfare reform. Quite the opposite, in fact. They deliver on the reforms as originally intended – making Universal Credit the simpler, smoother system it was always meant to be. It’s time for a hard reset of working-age welfare, to peel back the layers of extra benefits and to return to the principle that work should always pay.