The previous government made the mistake of trying to reduce poverty without paying attention to the supply side factors driving up the basic cost of living. It churned out billions in tax credits and Housing Benefit, while at the same time ignoring the fact that the cost of housing exploded while the cost of food, heating fuel and childcare also rose steeply. This is, to put it mildly, not a cost-effective strategy.
When a room is too cold, it is usually a good idea to check whether the windows are properly closed before turning up the heating – otherwise, one risks choosing a remedy that is expensive and only partially effective. Within this metaphor, Britain under the Labour years was a house in which a lot of windows were wide open like barn doors, and in which the heating system was running at full capacity. As a result, the (metaphorical) fuel bill exploded.
The current government tries to get the bills down to manageable levels again by adjusting the heating here and there, which is fair enough. But it has one unfortunate feature in common with its predecessor: it also ignores the cost inflators on the supply side. This creates problems of its own.
The recent proposal to raise the age of eligibility for Housing Benefit (HB) to 25 years is a good example. This measure will not have the catastrophic effects that the more hysterical critics claim (e.g. ‘Bright but poor graduates will be sent home and everyone will stay where they were born’), but it does suffer from all the inconsistencies that the more thoughtful critics point out.
The underlying driver of the explosion of the HB bill is the explosion of housing costs, driven, in turn, by an absurdly restrictive planning system. There is a wealth of evidence showing that housing costs are, above all, a function of the restrictiveness of the planning system, and if there wasn’t, common sense should be enough to tell us. Since the mid-1980s, Britain’s population has grown by about 4.5m, while average household size has fallen from 2.44 to 2.12. Meanwhile, completion rates of new dwellings have been astonishingly low, both in comparison with previous decades and with other countries. So of course housing costs have exploded, and of course HB expenditure has followed suit.
Yes, some restrictions to HB would still make sense even if housing costs were dirt cheap. If your rent is fully or partially taxpayer-sponsored, you do not have to live in the most expensive pockets of the country. Neither is there a reason why HB recipients should be fully insulated from the price developments which everyone else in the rental market has to cope with. But attempts to address the HB bill explosion while ignoring the supply side of the rental market are bound to fail.
The best way to bring down HB expenditure is to liberalise the planning system, so that more rental units can be built. This would have the additional advantage of creating numerous second-round savings. Moving people off the HB taper slashes their effective marginal tax rates (EMTRs) substantially, improving work incentives. To the degree that people respond to these improved incentives by increasing their working hours, the government would also achieve savings in spending on other means-tested benefits.
Unsystematic fiddling with the eligibility criteria is not the answer to the HB cost explosion. But as long as housing costs are anywhere near their present level, we are bound to get more of it.
As well as liberalising planning, the government should abolish HMO licensing, which acts as a deterrent to landlords entering the low-cost multiple-occupancy market. Moreover, it should rescind building regulations that hinder the expansion of capacity in existing properties. Unfortunately, the government is moving in the opposite direction with a host of green building regulations in the pipeline that will greatly increase the cost of new housing.
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