The benefits cap is popular - but it isn't right

The government’s proposed £26,000 cap on benefits for those out of work applies irrespective of circumstances and the family’s history. It will hit two groups: those with very large families, wherever they live, and people with three children or more in private rented accommodation in London and some of the south east.

It is easy to say that people should not have children if they cannot afford them. Applying a benefits cap retrospectively, to children who already exist, makes no sense as a policy of deterrence. If you want to disincentivise the poor from having children, the cap should apply to children as yet unconceived.

We do not know whether ‘conception deterrence’ works. To find out we should look at whether either the number of children born to parents on benefits rose when benefits were more generous. Then we would know whether economics enters people’s decision to conceive.

The second affected group are those with three children, who rent privately, and who lose their jobs, particularly if they are in London. These are people with reasonable work histories, who have never been in sufficient need to qualify for social housing. Equally they are not sufficiently affluent for a mortgage. This group includes many manual workers and people with relatively low skills. Think of the people who work for removals companies, and lose their jobs in the recession, because of the fall in house sales.

After rent, council tax, and utilities, someone with 4 children living in Tolworth, the cheapest part of Kingston, will have to live on 62p per day. That has to cover everything: food, school uniform, loo paper, the lot. It is clearly impossible to live on this. If you change the family circumstances a little, you can change the 62p figure – either up or down. But it is broadly accurate for a large number of those affected.

It seems strange to say to someone who has worked for 15 years, that on their first day out of work they will be plunged into poverty. Nor can we assume that they will have savings of any amount. The IFS record that 50% of people in Britain have less than £1000 in savings, and economic theory – income smoothing – argues that people with children should not save at that point in their lifecycle.

This group is surely part of the ‘Tory working class coalition’ that the party needs to command a majority. To tell them that they must either move to a one or two bedroom flat, be cold, or move to Merthyr Tydfil – where their employment prospects are much worse – makes no sense, socially, politically, or economically. At very least a grace period, of say six months, or even a year given the current state of the job market, would make sense.

It is sensible to cap individual parts of the benefit system – such as constraining where people can live. But to set an overall cap, irrespective of your history or circumstances, saves little, and will cause considerable hardship in a fairly arbitrary manner. The cap is popular, but it isn’t right, and may well become less popular once the effects become apparent.

 

Tim Leunig also discusses the benefit cap for the Guardian here.

Is this analysis based on a large scale simulation which could suggest just how many people would be affected in the way you describe, or is this based on hypothetical households? Is there any level of cap you could support? I agree that welfare benefits for the well-off should be cut, but this would have little impact on the "benefits culture" problem which is what the coalition wants to attack: its not just a means of cutting public spending.
I am not quite sure why you say that the focus is on a family who has worked - surely it is just as likely to be a family who have never been in work. But, in any case, as a bit of a neutral in this debate, here are two arguments in favour and two arguments against your case: In favour 1. It also discriminates in favour of people in council accommodation and against people in private accommodation assuming that the council (or so-called social) accommodation has the rent subsidised. 2. This could have been an opprtunity to re-inject an contributory element (i.e. the cap does not apply for 12 months in every 10 years of contribution history or something). I do not favour the merging of NI and income tax, I favour the re-creation of a clearer contributory principle prior to privatisation. Against 1. A family in a similar situation not on benefits would move a couple of miles to Hounslow. Why should people on benefits not have to suffer the same discipline (or save to prevent them having to move if misfortune arises).... 2. I don't buy your savings argument. We have a pitifully low savings ratio; there is also a precautionary motive for saving and that is discouraged by the welfare system. Saving is not a given stock as if it, somehow, does not respond to economic signals.
I can't really agree with this. For those with large families - capping benefits would surely shift their effective marginal tax rates beneficially. Whilst more should be done (by reducing taxes) to encourage such people returning to the work place, a benefit cap can be part of this. In terms of 'conception deterrence' I suspect that this probably is effective - it would be good to know. But at the very least, people should have to make a considered assessment whether they can afford additional children without state intervention. Britain already has the highest rates of children born into workless families in Europe. To my mind it would be politically difficult to apply the cap to children not yet conceived but not those already born, although it is true that - in order to end entirely the system of child benefit there would need to be some sort of cut-off point imposed. As for those in the South East and London made unemployed, perhaps there is more of a case for period of grace with benefits being withdrawn later. Ultimately, however, the existence of such circumstances points to the folly of a centralised state benefits system. A decentralised system might deal with this better. But better yet, if there were a proper private market for unemployment insurance then individuals could make their own provision whilst in employment, not be forced into reliance on the state. It may not be in the interests of the Conservatives not to alienate potential voters (I suspect the number of voters here is very small and doubt many of them would actually vote Conservative but still) but that is not a genuine reason for a policy choice, unless you are advocating further politicisation of the benefits system? The point about absence of savings is an interesting one - but hardly surprising. Why save when the state will offer you benefits? But on the other hand, with effectively negative interest rates and high inflation, provoked by central bank manipulation of the money supply, why would anyone want to save when their savings are losing value?
"Economic theory – income smoothing – argues that people with children should not save at that point in their lifecycle." Do you really mean 'argue that people should not', or should this read 'predicts that people will not'?
It is not the benefits cap that is the problem. Tim Leunig's figures are pretty dodgy as he assumes you can't rent a reasonable house for less than £1600/month in London. The problem is that the cap on its own won't solve the problem. Not that many people (percentage-wise) exceeded the cap anyway. The problem is that benefits will still be generous for some people and extremely miserly for others. The contributory principle has been largely ignored and people who have saved are discriminated against. Couples are taxed entirely separately, but are deemed the responsibility of their spouse by the social security system. Philip also makes a good point about people in council accommodation doing better out of the system because they are also effectively receiving a rent subsidy.

Tim is certainly correct that the benefit cap is a very crude policy. Nevertheless, its simplicity may be an advantage in terms of disincentivising welfare dependency - and in terms of gaining wider public support for welfare reform.

Regarding the issue of savings, I think it can safely be assumed that the family residing in Tolworth was capable of saving considerable amounts when working. This is because they would, in all likelihood, have had to save almost £4,000 to move into the house in the first place, i.e. one month's rent in advance and the equivalent as a deposit, plus removal costs. Moreover, an advantage of the benefit cap is that would deter such families from reckless behaviour, such as moving into a relatively expensive location, when their finances weren't secure.

Finally there seems to be an implicit assumption that such families can only get support from government when they run into difficulties. In reality, extended families still exist and in many instances grandparents, aunties and uncles etc. would offer financial support. There could also be opportunities for the parents to earn a few quid in the informal economy.

'Conception deterrence' makes eminent sense. But it has to run with the grain of the principle that extramarital reproduction is undesirable, as is improvident marriage. I propose that, for the future, any man who causes a woman other than his wife to become pregnant so that she is thrown onto public funds, the money should be recoverable from him and he himself should be treated as though a benefit fraudster. Improvident marriage would be discouraged by stipulating the possession of a minimum assured income (assessed at the time of marriage) as a condition of receiving benefits while married. Child benefit to be paid only for as many children as the parents' taxes can pay to educate.
Replies: Len - hypothetical households. I support caps on all elements of welfare, but not on the aggregate (the govt agrees - various disability benefits exempt you from the cap, so some people will still receive more than £26k). These changes do not attack the welfare culture for most people - e.g. if you have 0,1, or 2 kids there is no change, and no change if you have 3 and live outside the SE, and no change if you have 4 and live in social housing. If you want to attack welfare culture, this is tokenistic posturing. Philip - there are no penalties for saving up to £5k in the welfare system, and yet very few people do, so I don't think there is evidence that savings behaviour is being determined by the welfare system. Families not on welfare are very rich - remember that you still get big in work benefits on £35k. So most non-benefit families are unlikely to move in the way you say. They are likely to be home owners, with relatively small mortgages. I would not have to move, were I to take a big income hit. Whig - see my point to Philip on savings Philip W - I meant what I said - economic theory holds that income smoothing is welfare maximising. HJ - my figures are the government's, and cover outer SW London. I could have picked a more or less expensive area, but the people hit hardest are likely to be living in areas like this - not posh, but costly. Richards point that they have savings in the form of the deposit is irrelevant, since they cannot access it without becoming homeless. It is hard for people to predict the future - being a miner was once a good job for life, and I remember Chatham Dockyard shutting. Stuff happens, so to speak. I don't think that the simplicity will help deter welfare dependency, since it will only apply to a very small minority of the welfare dependent. See answer to Len. I have no comment to make to Michael.
Tim - you missed the point of my point on saving entirely. Long-term saving is certainly disincentivised by the welfare system (you should look at the work on pensions). However, in response to your specific point, I made a specific point about the precautionary motive for saving which is made less necessary by the welfare system. My point about moving was this. People in all sorts of situations choose to live according to their means - why should people in Kingston who are on benefits not have to make the same sort of choices? You have chosen Tolworth as the cheapest part of Kingston, but what about the cheapest part of west London? You choice of how far people can be expected to move is arbitrary. My suggestion that the cap be invoked for long-term claiments without adequate work history would deal with many of your problems.

Tim, my point about the deposit was not that it constituted savings they could use, but that it showed that the family had the capability to save a significant amount. If they weren't capable of saving, they couldn't have moved into the house in the first place.

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