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. 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.
Tax credits are one of the elements of welfare spending that will be replaced by universal credit over the coming years. Since universal credit is currently at an early stage of its rollout, we currently produce our forecasts by assuming that tax credits and the other legacy benefits continue being paid as before, then we add or subtract an amount to reflect the difference between universal credit and the six benefits and tax credits that will be replaced.
In our latest forecast, we expect tax credits spending in 2016-17 to total £27.5 billion, with 4.3 million recipients paid an average of £6,400 each. That would represent around 3.6 per cent of total public spending, and is equivalent to £1,000 per household and 1.4 per cent of national income.