Housing Benefit: Osborne’s approach does not address the dynamics of cost explosion

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.

If there was zoning law reform, the relative size of the UK’s housing stock could look more like that of Australia, Canada or the United States making the housing benefit a moot point.

The key problem with HB has always been the manner in which changes in payments are linked to changes in rents. This has effectively given landlords, in the social and private sector, an incentive to milk the system. The core of any change, as I argue in my IEA monograph in 2006 is to shift to HB paid according to notional local levels rather than actuals. There is also a case for reducing the BRMA to two – London and not-London.

What Dan O says, that fixed half the problem. As to HB itself, don’t forget that three quarters of it goes from one part of the state (DWP) to other parts of the state (local councils and housing associations). This is not really a cost, is it? It’s paper shuffling. It is only the HB paid to private landlords that represents a huge subsidy and a huge cost. As it would cost a fraction of that to build enough social housing for all comers, why don’t we just do that?

Why not just tell the impoverished to leave London? High rents should be an indicator that if one is not doing something useful, they should leave.

Another way to cut the HB bill – and avoid the paper shuffling Mark mentions – would be to sign over the deeds of low-value council and housing association properties to the tenants. They would then become owner-occupiers. There could also be significant savings in maintenance and upgrade expenditure, as well as improved labour mobility.

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