More thought required

The Chancellor's cuts to Housing Benefit are certain to have unintended consequences

By Mark Stephens

Housing Benefit –never previously a rival to house prices as a topic for ill-informed discussion at dinner parties – briefly captured the public imagination in the days following the Budget. George Osborne, the Chancellor, informed us that some people receive £104,000 a year in Housing Benefit. It turned out that the “example” was merely illustrative. But given that median incomes weigh in at less than one-quarter of this amount, anyone could be forgiven for assuming that the cuts announced in the Budget were just common sense.

Yet finding ways to help low income households to meet their housing costs has always proved to be problematic. Almost 60 years ago Beveridge failed to find an adequate solution to what he called “the problem of rent” in his famous report that laid the foundations of the modern social security system. He observed that rents varied greatly both between regions and within them. Moreover, they can’t be reduced quickly in the event of unemployment or sickness. This made it difficult to incorporate a standard amount for housing costs into mainstream social security benefits. Consequently, our pensions and unemployment benefits include no allowance for housing costs. Instead the social security system provided a top-up based on actual housing costs to prevent incomes being taken below the minimum by housing costs.

Meanwhile, our housing system did its best to protect people from high housing costs by providing council housing and controlling private sector rents. In time, such across-the-board subsidies were seen as indiscriminate and counterproductive (as, in the case of private renting, they certainly were). The 1970s equivalent of the spectre of £104,000 Housing Benefit payments was the family with a Rolls Royce parked outside their council house. So up went the council rents, away went the rent controls and in their place came a new targeted allowance, Housing Benefit – first introduced by Edward Heath’s government in 1972, with the current system essentially that introduced by the Thatcher administration in 1988. With the hiking of social sector rents and the deregulation of private sector rents, it is unsurprising that Housing Benefit became the largest financial subsidy to the housing system. Mr. Osborne might note that the elevation of Housing Benefit from the periphery of the welfare state to become a central plank of income maintenance was quite deliberate.

Housing Benefit (HB) has two peculiar features, each of which is derived from the absence of an allowance for housing costs in mainstream social security benefits. First, it can pay the whole of a household’s rent. Second, if the rent rises by £1 so does the HB. Each of these features can give rise to what economists like to call “perverse incentives.” Consequently the central feature of the HB system – to protect residual incomes – has always been tempered by the need to police excessive rents – “upmarketing”. Housing Benefit has always contained provisions to limit eligible rents on which benefit is payable, but these were tightened for private tenants generally and young single people in particular in the mid-1990s.

Labour discovered how difficult it is to reform the system to make it more market sensitive. The new Local Housing Allowance (LHA) meant that private sector HB was no longer based on actual individual rents within a locally determined ceiling (the “local reference rent”) – a system that led to two-thirds of rents being capped. Instead LHA was based on the median rent in a locality. If the rent was above this level (as it was in almost half of cases) then benefit would be capped; but if it were below the median then the tenant could keep up to £15 per week – a feature intended to provide a “shopping incentive”.  By the time of the election, the government had long kicked the prospect of extending this system to social housing into the grass, and had already proposed to replace the (up to) £15 incentive with a cap based on median (local) rents. Attention shifted to adapt the benefit better to meet the needs of people moving into low paid or insecure work.

In attempting to reform HB, Labour faced the two constraints: the historic exclusion of an allowance for housing costs in the mainstream social security benefits, and the central role given to HB in the housing and consequently income maintenance system by previous Conservative governments.

If Messrs Duncan Smith and Field attempt to reform HB, they will of course encounter the same historic constraints. Meanwhile, Mr. Osborne has opted simply to cut it, not reform it. He proposes six cuts to HB:

• Placing caps on the absolute amounts of HB for private tenants.


• Limiting private sector HB to the 30^th percentile of the local rent, rather than the median as is the case now.


• Uprating the maximum benefit allowable to private tenants by consumer price inflation (CPI) instead of actual rents.


• Increasing non-dependent deductions. These are deductions made from eligible rent to take account of (for example) adult children living in the household.


• Cutting HB by 10 per cent for the long-term unemployed.


• Limiting benefit entitlements to social tenants to match household size.

On one level, there is not very much to debate about these cuts. Each will cause hardship, though precisely how much hardship and what kind is difficult to say. We can be sure that the impacts of the limits to absolute rents will be greatest in high-cost areas, especially London. The limits on relative rents will be greatest in areas, such as some seaside towns, where HB tenancies are most common – where half of tenancies receive HB it is evident that they cannot possibly all downsize into the bottom 30 per cent. The market might react by reducing rents where supply is loose, but not where demand is high.

Uprating eligible rents by the CPI (instead of actual rents) is a classic stealth cut, imperceptible at first but snowballing over time – this is how the state pension was devalued in the three decades after 1980. Non-dependent deductions are a documented cause of hardship and family strife which prompted Labour freeze them in the early 2000s. Unintended consequences might arise from the attempt to match limits on social sector rents to the size of the household: what if there are no smaller properties available?

Yet the changes may have consequences that extend beyond mere “cuts”. The cuts for the long-term unemployed might effectively end security of tenure in the social rented sector (excusing the metaphor) by the back door. It will also become increasingly difficult for local authorities to fulfil their obligations under the homelessness legislation as the use of private tenancies to provide temporary accommodation until a social tenancy becomes available, is dependent on HB. So it would be no surprise if there were a return of the “pregnant teenage queue jumpers” to the pages of the newspapers as a prelude to the weakening of the homelessness legislation.

Recently, I led a study of housing systems in six countries for the European Commission. We found that the British housing system helped to compensate for the high levels of income inequality and poverty that persist in this country. The importance social housing, the homelessness legislation and the extensive use of Housing Benefit become all the more apparent when placed in an international context. Mr. Osborne’s proposals deserve more critical consideration and debate, and certainly greater honesty than their justification by extreme hypothetical individual examples.

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29 July 2010

Mark Stephens. Professor in Urban Economics, University of Glasgow