Watchdog casts doubts on welfare budget savings

The independent fiscal watchdog set up by the Chancellor George Osborne has cast doubt on the savings he claims he will make by cutting the welfare budget.

The Office for Budget Responsibility (OBR) questioned the projected savings from the two biggest revenue-raising measures in the £7bn of welfare cuts announced on Wednesday.

The OBR warned that people affected by curbs to child benefit and employment and support allowance (ESA) might change their behaviour in an attempt to escape the cuts. The measures are due to save £2.5bn and £2bn a year respectively – more than half of the total.

On child benefit, the OBR suggested that people might reduce their working hours so their income dropped below the £43,876 threshold for the 40p in the pound tax rate in order to retain their child benefit. It is being axed for families with a top rate taxpayer from 2013.

"Taxpayers with children and incomes just above the higher rate threshold have an incentive to reduce their hours worked or find other ways of reducing their taxable income, such as increasing pension contributions, taking part in salary sacrifice schemes or making donations subject to Gift Aid," the OBR said.

It added that the child benefit cut could also have a wider impact on the economy as a whole – for example, if people reduced the amount of overtime they worked or couples changed the amount of hours they worked between them so they both remained below the higher rate threshold.

Similarly, the watchdog warned of "uncertainties" about the Government's assumptions about the number of sick and disabled people switching from incapacity benefit (IB) to ESA, which is replacing it. "Given the significant differences between the IB and ESA regimes, this is a key source of uncertainty in the costing," it said.

Labour seized on the OBR's warnings last night as evidence that Mr Osborne's sums might not add up. Douglas Alexander, the shadow Work and Pensions Secretary, said: "We know that the Government's own figures show that their hit to growth and jobs increases costs, with £700m more spending on unemployment benefit in the next four years, because of more people out of work. A longer dole queue means a higher, not lower, benefits bill."

The Treasury declined to comment on the OBR's warning. But government insiders described it as a positive sign that the watchdog was working well. Officials said forecasts of spending and tax revenues were always subject to some uncertainty and were often amended at a later stage.

Under the changes announced on Wednesday, claimants will be means tested after a year of receiving ESA. They will lose the benefit if they having savings of more than £16,000 or an income of £90 a week in total.