IEA Blog

Some of the old video recorders made in the 1980s had an annoying kink: they could not hold the freeze frame mode for long. Shortly after pressing the pause button, they would automatically switch into play mode again.

This is also a common property of caps and freezes on public expenditure programmes. George Osborne’s Emergency Budget speech showed that the coalition is set to press quite a few pause buttons. Fair enough. But this will not prevent the play mode from kicking in again in a couple of years, because the underlying dynamics of cost increases are left in place.   

The treatment of Housing Benefit (HB) epitomises the above. Through measures like quantitative upper limits on the reimbursement of housing costs, a decline of HB spending by £1.8bn over the next five years is envisaged. This is an achievement, after a long upward trajectory. Osborne’s honesty was also encouraging: “Costs are completely out of control. We now spend more on Housing Benefit than we do on the police and on universities combined.”

But costs spiralled out of control for a reason. HB works, in practice, much like a cost reimbursement scheme. The amount which can be claimed is equal to the median rent for a specified property type in a specified area, the so-called ‘Broad Rental Market Area’ (BRMA). But since there are so many BRMAs – England alone is divided into 153 of them – a claimant’s actual rent will usually come quite close to their reimbursable rent.

This means that there is little incentive for HB recipients to economise on housing. Moving from an average-priced 1-bedroom-flat in Inner North London to one in Outer Northeast London would cut rental costs by almost £5,000 per year. But it would cut entitlement to HB by exactly the same amount.

This leads to the absurd situation that 30% of all households living in Inner London receive HB. The national record is held by the borough of Hackney, with a share of 44%.

The number of BRMAs should be cut down to a dozen or so, and HB should be paid out as a fixed lump sum based on household size. HB could be gradually reduced, as recipients would gradually move to cheaper areas. Far from “penalising” the poor, this would mean treating HB recipients like adults, who make a trade-off between housing and other goods like everyone else.

Even Margaret Thatcher didn’t manage to dismantle Britain’s disastrous welfare system. Judging by the policy plans of the Lib-Con coalition, there is little reason to be optimistic that today’s leaders will be any more successful. The timid proposals on welfare are little more than an expansion of existing failed programmes.

It is unsurprising that welfare reform has presented such a problem for successive governments. The six million working-age adults who now receive out-of-work benefits – plus millions more over-60s receiving generous pension credits – comprise a large voting bloc. Labour would have risked losing its core support had it attacked benefit dependency.

Within the new administration, the rebranded, centrist Conservative Party will be wary of implementing policies perceived (wrongly) as an attack on the poor, while any major changes could face strong opposition from the Liberal Democrats’ hard-socialist Left.

Nevertheless, the dire state of the public finances means the Government will have little choice but to make substantial cuts in welfare expenditure…

Read the full article in The Daily Telegraph.

Unemployment figures may still look bleak, but there is one occupational group which can be thoroughly relaxed about their future employment prospects. If Ending child poverty: mapping the route to 2020, a policy document accompanying the Budget, offers any glimpse of what the next decade may look like, then rosy times are ahead for social workers (broadly defined, for lack of a better term).

The document does not contain many specific policy proposals, but its overtone is: there is no social ill which cannot be cured if only the right programmes, projects, initiatives, pilots, strategies, support schemes, advice bureaus and partnerships take concerted action. This is a plea for a hyperactive, multi-level, multi-dimensional, multi-intervention approach.   

To be sure, the document contains well-argued passages. The authors point out that almost 18% of British children still live in jobless households, compared with 7% of Danish and 5% of Swedish children. They also note that just over half of the UK’s single mothers are in some form of paid employment, compared with more than 80% of Danish and Swedish single mothers. When they credit in-work support policies for having increased the employment rate of single mothers by 12 percentage points over the past decade, they are probably right.  

But whenever the authors identify the shortcomings of current policies, they immediately ask “How can the government do more to rectify this?”, which makes the paper a one-way street.

For example, they criticise the complexity of the current benefit system and the adverse effects this creates. And then comes the remedy: “local practitioners who work directly with families will soon be able to use a new Government produced guide to benefits and tax credits, which will allow staff to advise parents of what support is on offer, who is eligible for it and how they go about claiming.”

The authors also acknowledge that people on housing benefits can sometimes make themselves worse off by taking up work. They then go on to praise a local pilot project, which temporarily tops up people’s housing benefits to compensate for steep withdrawal rates.

If you enjoy hands-on, “more-action-is-required” rhetoric, then this paper is essential reading. 

The cost of Housing Benefit (HB) has exploded over the last five years, rising from £13.5 billion in 2004/05 to £20 billion in 2009/10. This is a cause for deep concern, not just because HB is a major burden on taxpayers, but also because it produces severe disincentives for workless people to enter employment.

The benefit is withdrawn at a rate of 65p for every pound earned above a certain amount. For many claimants it is the main reason that it is not worth starting low-paid work. This withdrawal of HB is normally in addition to the withdrawal of benefits and labour market taxes that have to be borne at the margin.

The Housing Benefit trap is particularly pernicious in high rent areas such as London. The capital receives 26% of HB payments although accounting for 12% of the UK’s population. This may partly explain why parts of London have some of the highest rates of worklessness in the country despite the wide range of employment opportunities.

From time to time the newspapers print a story that illustrates the problem. Last month the Evening Standard looked at the case of a mother of six receiving HB to rent a £2 million house in St John’s Wood, at a cost of £6,400 a month. Once other benefits such as Child Tax Credits and Income Support are factored in, as well as Income Tax and National Insurance, it’s clear she would have to earn in excess of £150,000 a year to be better off in work.

Such perverse incentives, as well as the clear injustice of such cases, provide strong arguments for reform of the system both to reduce public spending and address high levels of welfare dependency.

A simple first step would be to phase in a requirement for HB claimants to pay a proportion of their rent out of their basic benefits (such as Income Support). This would act as a deterrent to those exploiting the system to live in luxury homes in exclusive areas and would encourage tenants to seek out low-cost accommodation.

A second measure would be to reform the “local connection” criteria which in effect provide claimants with an entitlement to live in a particular area, no matter how expensive. Councils should be far freer to house homeless families in low-cost areas. At the very least, they could be housed in cheaper areas within a short commute of the borough in question (for example, Westminster Council could house people in Barking and Dagenham).

The long-term solution to the Housing Benefit problem lies, however, in the liberalisation of planning and building regulations that prevent the supply of ultra-low-cost accommodation. A liberal approach to land use could finally bring an end to this costly, complex and counterproductive system, and go hand-in-hand with the abolition of housing benefit so that all welfare benefits were simply paid as untied cash.

Classical liberals, and many Conservatives, will tend to take a dim view of government intervention, but should they be equally dismissive of all government action?

Take a couple of examples from housing policy. First, social housing is funded in part by government subsidy and is allocated to those households that are considered vulnerable and in greatest need. However, because of their vulnerability they are deemed to need continuous support to maintain their tenancy. And of course, they are likely to be out of work and so are eligible for Housing Benefit to fund their rent. So the majority of social housing tenants receive a subsidised tenancy and a further subsidy to pay their rent, all backed up by a support system of housing professionals. So, even though their housing need is fulfilled by the granting of a tenancy, these households remain dependent on continuous support.

Second, the Right to Buy allowed social tenants to purchase their existing dwelling at a discount that depended on their length of tenancy. After a number of years they may sell the dwelling and keep any capital gain. In many cases this provided a considerable financial benefit to households. However, the key point about Right-to-Buy discounts is that this subsidy is a one-off: once they receive it households can no longer claim any state support for their housing costs and are expected to maintain the dwelling themselves. The result in this case is independence and heightened personal responsibility. They are given initial support, but after that they sink or swim on their own.

I would argue that the Right to Buy was a thoroughly benign form of state intervention that created greater freedom and independence rather than tying households permanently to state support. Perhaps we should see this as the model for how a newly elected Conservative government should act: they should seek to develop forms of support that make a permanent difference through a specific limited intervention.

Peter King’s new book, Housing Policy Transformed: The Right to Buy and The Desire to Own, will be launched at the IEA tonight. Click here for details of the event.