Give and take: the spending review and housing benefit

Originally posted on November 17 on Inside Edge 2, my blog for Inside Housing

Two separate reports over the weekend claimed that housing benefit is being targeted by George Osborne for £2bn worth of savings to fix his tax credits debacle.

Iain Duncan Smith famously responded to Osborne’s July Budget ‘triumph’ with a fist-pumping celebration. The triumph soon began to crumble it became clear that the Budget really amounted to a message to work hard, do the right thing – and get screwed. As that realisation dawned, the scene was set for a struggle between the two Cabinet ministers played out in media briefings over an apparent raid on universal credit to pay for mitigation.

Now, according to the Financial Times and Sunday Times (£), IDS has won the battle. The overt message of the two stories is that housing benefit will be cut instead but there is also a worrying subtext about social housing and deserving and undeserving claimants.

The Sunday Times headline claims that ‘IDS quit threat foils benefit raid’ when it’s done nothing of the sort. We’ll have to wait for the fine print of the spending review to find out if the DWP official briefing this is correct but it seems it’s the raid on universal credit (by increasing the taper rate again) that ‘s been foiled. Instead ‘deeper cuts in housing benefit will now be found’ with IDS pushing his plan to give tenants a free share in their home. The implication is that housing benefit is seen as fair game even though it goes to people in work as well as out of work, perhaps even the same ‘hardworking families’ that face cuts in their tax credits.

The FT report has this contentious paragraph:

‘DWP officials are preparing alternatives which include ideas for how to cut the £25bn bill for Housing Benefit, a social housing subsidy. In the Summer Budget, Mr Osborne announced he would freeze a key part of the benefit — the Local Housing Allowance — for four years and now wants to go further.’

A social housing subsidy? That will come as a surprise to the private landlords who receive 40% of it – and to anyone who thinks housing benefit is a personal subsidy alternative to the bricks and mortar subsidy of investing in social housing. The FT does not normally get things like this wrong so if this is what the DWP is briefing this is alarming. For social landlords and tenants, the implication that Osborne wants to ‘go further’ than the LHA cuts is that they are in his sights.

So where might the Osborne/IDS axe fall? If you think about it, they are already insulated from the impact of rent increases. The government may have rejected rent regulation in the private sector (see the mild version that’s about to happen in Ireland) but LHA rates are already frozen until the end of this parliament. In the social sector, the government is imposing a 1% a year cut in rents rents for the next four years.

That means that logically any further savings will have to come from:

A fall in the number of claimants. Home owners cannot claim housing benefit and this seems to be the logic behind IDS’s plan to give away council houses or a stake in them. See my blog last week and Kate Webb’s blog for Shelter for reasons why this does not stack up: apart from anything else it will cut new supply and new lettings, meaning higher housing benefit costs for more people stuck in private renting. Doh!

It does seems possible that more people will move into work and off full housing benefit if the economic recovery continues (though the number of in-work housing benefit claimants would also rise). However, the housing system will be driving up costs at the same time. Analysis published by Savills on Monday suggests that government policy will leave an extra 70,000 households a year unable to afford to buy or rent at market levels. As it comments: ‘Failure to provide additional sub-market housing 
will increase reliance on a shrinking pot of benefits and tax credits.’

A further cut in entitlement to break the link with rents. This is the basis of many of the cuts introduced so far, with the government arguing that it would lead to a more efficient use of stock (in the case of the bedroom tax) or a reduction in rents (in the case of LHA caps). There is little evidence that either has happened so far. DWP documents leaked during the election campaign suggested scrapping housing benefit for the under-25s and increasing the bedroom tax. And what price an LHA-style allowance for social tenants? See more on these points below.

A bigger fall in social rents.  The Treasury estimates that the 1% cut will save £1.4bn from the annual housing benefit bill by 2020. Rumours that Osborne will go further with a 2% per year cut may be the opposite of wishful thinking but they are persisent. That would have a huge impact on business plans and new development (increasing the housing benefit bill in the longer term) but that did not stop the last cut.

With the Welfare Reform and Work Bill in the House of Lords today, the National Housing Federation is calling for an exemption for the 1% cut for ‘specified accommodation’, warning that vulnerable groups like war veterans, people with learning disabilities and victims of domestic violence will be drastically affected. Could Osborne accept this – and then impose a 2% cut in mainstream rents?

One further point to note about this is the potential for constitutional conflict. The Treasury is pressing other UK nations to match the English 1% rent cut or find savings from elsewhere. Double the cut would mean double the conflict.

Building more social housing. Yes, I know this won’t happen but I’ve snuck it in here to point out that doing the opposite and refocusing the housing budget on home ownership will drive up housing benefit costs.

That hopefully gives some idea of what might be on the agenda if Osborne does look to cut housing benefit by another £2 billion next week. As a final illustration, here are some costed options from the Institute for Fiscal Studies from its Green Budget in February:

• Abolish housing benefit for the under-25s (estimated savings £750m). Under-21s on JSA are already set to lose their automatic entitlement. The savings estimate assumes exemptions for families with dependent children.
• Reduce maximum housing benefit for all social tenants from 100% to 90% of rent (£1.6bn). Effectively this would be a bedroom tax on all tenants. However, this savings estiamte includes pensioners (see below).
• Reduce maximum housing benefit for all tenants from 100% to 90% of rent (£2.5bn). This savings estimate also includes pensioners – they get £6.8bn in housing benefit so exempting them would reduce the saving by £680m.
• Reduce maximum housing benefit entitlements for social sector tenants to LHA rates  (£700m). The IFS estimates that 750,000 social tenants have a rent higher than the local LHA rate and that they would lose an average of £1,000 a year each.
• Reduce LHA rates from the 30^th to 20^th percentile (£400m). This would squeeze the options for tenants on housing benefit even further.

That’s just a flavour of the options available to Osborne if he really is going to make housing benefit claimants pay for his tax credits mistake. He could find the money by relaxing his self-imposed financial targets or reversing his £1 billion cut in inheritance tax on main homes. If he targets housing benefit instead, some of these cuts could hit the same people in a different part of their pocket. There are none that do not hit substantial numbers of people on top of existing cuts and those made in the Summer Budget. The supposed post-election Conservative revolt against the bedroom tax seems a long time ago.