Fiscal illusions

It reads as a passage written with more than an economist's glee. In yesterday's Fiscal Risks report from the George Osborne-created Office of Budget Responsibility, comes a new Primary Spending Risk...

"The likely cost of the BBC’s recent decision to means-test free TV licences for the over-75s by
linking it to pension credit – thereby potentially prompting a material number of those
currently not taking it up to do so – poses a fiscal risk that we had not previously envisaged.
It is unusual for a government to delegate parameters of welfare policy to a broadcasting
company to save money. The unintended consequence is likely to be that the link to pension
credit receipt will raise welfare spending by more than bearing the remaining cost of free
licences reduces BBC spending, so the budget deficit will rise not fall. "

That summary may seem pointed enough, but there's loads more schadenfreude in the full analysis of the consequences of Osborne's cute 2015 attempted trammelling of the BBC. 

"Free TV licences for households including someone aged 75 or over were introduced in 2000,
with the BBC being compensated for the foregone revenue by the Department for Work and
Pensions (in effect transferring some of the BBC’s funding from licence fee receipts to general
taxation).

"In 2006, the licence fee as a whole was reclassified as a tax, making the free licences
in effect a tax relief. All BBC income and spending is treated as part of the public sector finances.
In the July 2015 Budget the Government announced that compensation from DWP would be
withdrawn progressively, so that from 2020-21 the full cost of free TV licences would be borne
by the BBC. As part of that agreement, the Government gave the BBC responsibility for the policy
beyond the term of the then current Parliament, legislated for in the Digital Economy Act 2017.
We have assumed to date that the BBC would maintain the current system of free TV licences, so
that the reduction in compensation would reduce BBC spending and the budget deficit.

"However, the BBC launched a consultation on the future of the concession in November 2018,
and in June 2019 announced its decision not to maintain the current system but to focus
eligibility on households containing someone aged 75 or over who receives pension credit. A
report prepared for the BBC by Frontier Economics estimated that maintaining the current
regime would cost the BBC £745 million in 2021-22, but that means-testing it in this way would
reduce the cost to £209 million, after accounting for additional administration and compliance
costs but assuming no increase in pension credit claims. Announcing its decision, the BBC Board
estimated the full cost at £250 million, factoring in “implementation costs including compliance
with the new policy and possible increased take-up of pension credit”.

"The scale of any likely increase in pension credit claims is highly uncertain. If the £40 million
increase in costs estimated by the BBC Board were accounted for entirely by higher take-up, this
would imply around an extra 250,000 claimants, costing around £850 million depending on
their characteristics – more than the original move was expected to save the Government. And
since the BBC will spend the £500 million or so it saves by means-testing, the overall cost to the
public finances will be even greater relative to the assumptions in our latest forecast.

"DWP estimates there were around 470,000 people aged 75 or over who were entitled to the guarantee element of pension credit in 2016-17 but who did not receive it, almost 40 per cent of the total number entitled. These had an average entitlement of £65 a week, resulting in around £1.6 billion of unclaimed benefit among this age group.  So around half of that group would need to start claiming to wipe out the expected savings from transferring responsibility to the BBC and the BBC cutting its domestic spending by a corresponding amount. But if the BBC spends what it saves via means-testing free licences, that fraction would fall to only a sixth.

"Experience from 2003 to 2008, when DWP undertook extensive activity to encourage pension credit claims, suggests that very large increases in take-up are unlikely, but more than a sixth is quite possible. The critical difference this time is that potential claimants are facing a potential loss via the licence fee, whereas then they were only forgoing income they had never claimed. During this period, take-up of guarantee credit initially increased, but plateaued at between 70 and 80 per cent of those eligible. DWP narrowly missed its 2008 target of 2.2 million guarantee credit claims and fell further short of its 3.2 million target for pension credit.

"Part of this disconnect between the then estimates of entitled non-recipients and the ability for
DWP staff to identify them was thought to be shortcomings in the estimation methodology, in
particular mis-recording of benefit receipt by respondents to the family resources survey (FRS)
and the understatement of savings. But methodological improvements since then, including
matching FRS responses to administrative data, have increased rather than reduced estimated
non-take-up, partly as a result of better identification of disability benefit receipt, which further
increases the numbers entitled to pension credit (and the amounts they receive).

"The publicity associated with the latest change will also be different, with more scope for the BBC
to use its channels to advertise pension credit than DWP had with a limited communications
budget. The BBC has stated its aim to encourage take-up of pension credit, saying:

“… We want to raise the visibility of Pension Credit, which Age UK cites as one of the

reasons why people don’t claim, and have already written to charities and older people’s

groups to work together to do this. We have started a public information campaign which

includes using our airwaves and writing to all 4.6 million households setting out the new

scheme. We hope that pensioners will consider claiming as they could then be eligible for

around £2,500 and other benefits as well as a free TV licence.”

"DWP took a similar approach, but eventually concluded that “it would not represent value for
money to repeatedly press unwilling eligible people to take up their entitlement.”

"Today's over 75s might, however, have different experiences and awareness of the benefit
system, and attitudes to claiming, than their counterparts 15 years previously. This may increase
the likelihood of take-up. Between 2012-13 and 2016-17 the proportion of eligible people aged
75 or over taking up the guarantee element of pension credit has fallen by almost 10
percentage points. This is likely to reflect a combination of the lack of proactive take-up
promotion by DWP and the gradual reductions in pension credit as a whole as the savings credit
element has been eroded in value. If this fall in take-up were reversed, there would be around
120,000 extra claimants of pension credit, at an annual cost of around £400 million.

"The BBC’s announcement appears already to have had an effect. New pension credit claims
rose from 7,600 in the four weeks to 7 June (immediately prior to the announcement) to 9,300
in the four weeks to 4 July. After allowing for the fact that no new claims were made on the late
May bank holiday, that represents an increase of around a quarter.

"Potential knock-on effects of the BBC’s decision extend beyond pension credit. In particular the
act of claiming pension credit might prompt additional claims for attendance allowance,
particularly among those who receive advice from third parties. And for those renting their
homes, claiming pension credit could increase claims for housing benefit, though given the
higher level of take-up of housing benefit among pensioners (perhaps due to it often being paid
through a reduction in rent rather than as a benefit), the risks here appear smaller.

"In summary, it is relatively unusual for a government to delegate parameters of welfare policy to
a broadcasting company in an attempt to save money, and it is perhaps not surprising that this
may have unintended consequences. The BBC’s decision to means-test free TV licences via a link
to pension credit receipt may well raise welfare spending by more than it reduces BBC spending, particularly once the BBC spends the money it saves by means testing. The net effect on the
public finances would therefore be to push the budget deficit up not down.

"Government policy towards the licence fee in recent years also highlights the fiscal illusions and
policy risks to which hypothecated taxes or charges of this sort are prone. In principle the licence
fee is a charge that people choose to pay for the right to receive broadcast services, but the link
between the amount that licence holders pay and the money that the BBC spends providing its
share of those services has been weakened first by requiring it to pay for part of foreign policy
(the World Service from 2014) and now part of welfare policy. Given the fate of other attempts
to reduce the generosity of parts of the welfare system in recent years, there is also a risk that the
Government will step in to prevent or ameliorate the losses for those due to lose out. "