Analysis and Housing Benefit

by Ken Gibb

Last night there was an impressive episode of Analysis on Radio 4 with Paul Johnson of the Institute of Fiscal Studies asking ‘What’s Housing Benefit for’? It was hard to disagree with the basic tenets of the argument, be it the diagnosis of why HB is so large (now £25b per annum), the mixed impacts of welfare reform or the programme’s conclusions about what is to be done. While I suspect a little more could have been said explicitly about the design of HB, the key point – that HB is in part the consequence of wider housing policy failure over generations (especially in the owner-occupied sector) – needs to be stressed and reiterated as widely and as often as is possible.

The programme reminded us that Beveridge would rather have established a fixed rate housing subsidy but that the ‘problem of rent’ – its massive variation even within regions let alone across the country, made this (and it remains) completely impractical. For this reason HB has been based on actual costs rather than a fixed allowance (though this has been lessened by the design of the local housing allowance in the private rented sector).

The second pivotal design feature is that the broader social security system is premised on a minimum level of income (varied by household type and need) after housing costs. This in turn allowed the unusual circumstances that UK social security could pay all of someone’s housing costs and moreover, HB would rise one for one with housing costs (and fall back too). Again, this principle was attenuated by the introduction of a local housing allowance setting a ceiling on support based originally on the median of local market rents.

There was an interesting digression in the programme when David Willets, then in Mrs Thatcher’s policy unit, was involved in the decision to explicitly shift subsidy from things (i.e. new homes) to (poor) people. Implicitly, this was an assertion of consumerist welfare economics ideas that promoted cash transfer over in-kind subsidy as welfare improving for the individual. But note that HB was never a cash transfer in the pure sense.

Inevitably, and rightly, the programme also focused on the welfare reform programme that was significantly aimed at HB (the second largest working age benefit). However, rather than the usual debate over the bedroom tax, the stress was on the deep cuts to private renting HB (the local housing allowance). Moreover, it was recognised that in some places such as coastal towns, the majority of private renting tenants rely on benefits and in that sense HB literally leads the market.

There was also an interesting side debate regarding whether these cuts to the local housing allowance would reduce mixing of communities and reduce social cohesion. Proponents of welfare reform argued on the one hand that housing costs and income differentials had already created this spatial segregation and that implicitly HB reform would be a relatively marginal impact on this process. On the other hand, there was no cross referral to the recent proposals to fund replacement social housing for housing associations under the RTB proposals (i.e. funded from high value council housing sales) which will only reinforce these problems.

Finally, there was much talk of the ‘surprising’ 2015 Budget decision to cut social rents by 1% in each if the next four years. Those interviewed agreed that this looked like a non strategic cost-cutting wheeze and showed little awareness of the impacts on social providers, not just in terms of reduced development but on wider operational budgets as well.

What’s to be done? There was unanimity around building more homes in both the social and private sectors but more than that there was recognition that the root causes of the increasing HB bill is that rents rise in part because underlying housing and land costs have been inflating for so long. It is the wider failure of housing policy, of falling to join up the dots, that is what really matters. The large scale of home ownership premised on rising asset values and under-taxing capital growth indirectly also means higher rents and HB costs. Part of the price we pay for our unaffordable and exclusionary home ownership model is higher rents, more scarcity and yes higher HB.

The solution (or part if it) stares us in the face. We can reduce HB if we are willing to countenance lower housing costs systematically and lower land values across the board and stop chasing the illusion of rising housing and land asset values. The other thing that no-one is talking about is that regardless of the changes made to HB since 2010 – its design was flawed and remains so. There is still a second longer term agenda item to try to design a more feasible, efficient and cost-effective low income housing allowance system. A topic for another day.