The Housing Bill: Price to pay

Originally published on May 5 on Inside Edge 2, my blog for Inside Housing

On Tuesday Brandon Lewis told the press that there would be no further concessions on the Housing Bill. A little over 24 hours later there were…further concessions.

On a day of five more defeats in the House of Lords, which will now ping pong back to the Commons, the biggest surprise for me was the last-minute changes to Pay to Stay announced by communities minister Baroness Williams.

The House of Commons overturned three previous Lords defeats on the controversial policy on Tuesday. To recap, the Lords had increased the thresholds to £40,000 and £50,000 in London, called for the thresholds to be increased in line with inflation every three years and reduced the taper rate from 20p to 10p. On all three the government claimed ‘financial privilege’, a strong message to the Lords to back off.

The stage was set for a new battle on Wednesday over slightly watered down Lords amendments but (probably fearing defeat) the minister announced a compromise – a taper rate of 15p and annual uprating of the thresholds in line with CPI inflation – that was accepted by peers.

Compared to the prospect of full market rents above the thresholds, or even the 20p taper, the concessions are significant improvements that make it fairer and reduce disincentives to work. As I read it, families will now pay roughly £3 a week more in rent for each £1,000 of joint income above thresholds of £31,000 outside and £40,000 inside London.

There were also answers to some of the questions I raised in previous blogs. Pay to Stay will only apply to the taxable income of the main two earners. Tax credits and benefits including child benefit, DLA and PIP are excluded from the calculation and anyone on housing benefit or receiving the housing element of universal credit will be exempt. The minister confirmed yesterday that this covers people who become eligible for housing benefit because of the higher rent as well as existing claimants.

However, the policy that started life as an attack on council housing ‘fat cats’ like Bob Crow and Frank Dobson will still affect people way down the income scale. The thresholds seem set to ensure that people on the National Living Wage are not affected (the ultimate absurdity) but Pay to Stay will still affect couples earning as little as £7.50 an hour outside London if they both work 40 hours a week. People in work from nurses to ambulance drivers and firemen to shop assistants could find themselves classified as ‘high income social tenants’ if they work enough hours and they are in a couple.

While accepting the concessions, peers made clear their continuing disquiet. Lord Best said Pay to Stay was ‘an entirely unwelcome imposition on hard-working council tenants, and I do not like it one bit’.

Lord Kerslake called it ‘a form of tax collection done by people who are not tax collectors’. Under our current system, people pay an extra 20% in tax on all income above £43,000 and another 5% above £150,000. Pay to Stay is in effect an extra 15% tax on people earning as little as £15,500 each that only applies to council tenants.

Finally, Lord Beecham contrasted Pay to Stay with the ‘financial privilege’ the Bill extends to buyers of starter homes ‘who stand to benefit from discounts of more than £80,000 in London on the more expensive houses and tax-free capital gains when they eventually sell’.

But now that the final shape of the policy seems settled there is a bigger problem with Pay to Stay. The fairer you make it by lowering the taper rate, exempting people and excluding some income, the less money it will raise. The less money it raises, the more you start to wonder if it’s worth collecting in the first place.

Local authorities will now face having to collect and verify the incomes and circumstances of all their tenants who are not on housing benefit. This will probably have to be done once a year and there will also have to be some system to cope with people whose income suddenly falls when they lose their job or hours. It will also involve linking their systems with HMRC in an (I think) unprecedented way.

A DCLG impact assessment last year (before Pay to Stay was made voluntary for housing associations) estimated that social landlords would incur £45m in transitional costs £28m a year in admin costs that they would be able to deduct from the extra rental income they have to give to the Treasury. That works out at around £62 a year per tenant affected, which looks very much on the low side, and there would also be unspecified extra costs dealing with HMRC.

The assessment also attempted to estimate the impact of behavioural factors that will reduce the money raised. Faced with a higher rent, these could include people deciding to move, or reducing their earnings or hours or (if they can afford it) exercising the Right to Buy.

The DCLG estimated that these behavioural impacts would more than wipe out all of the extra rental income raised from the 130,000 council tenants earning more than the thresholds based on 2012/13 data.

Overall, it said, the policy would raise £510m a year for the Treasury by 2020/21. However, this was only because ‘fiscal drag’ would mean more tenants paying higher rents over time (an estimated 70,000 by the time Pay to Stay starts in 2017/18) as the thresholds were not uprated in line with rising earnings.

Those figures do not include the effect of a taper. The March Budget documents estimated that the policy with a taper would raise £305m by 2020/21. The first concession – a reduction from 20p to 15p – will presumably reduce that even more though it’s also possible a lower rent increase will mean fewer behavioural impacts.

However, the figures did not include uprating the thresholds in line with inflation either. That means that the only new victims will be tenants whose earnings rise faster than prices. This will significantly reduce the impact of the fiscal drag that was the only reason the policy stacked up financially in the first place.

The government remains committed to the principle of Pay to Stay and encouraging better-off tenants to buy. As Baroness Williams put it yesterday:

‘It is simply not right that social tenants who are no longer in housing need should take up valuable social housing when there are families in much greater need on waiting lists. If these higher-earning tenants wish to remain in their property, which is their choice, then it is right that they contribute more.’

But if it will raise little more than it costs to collect, or possibly even less, is Pay to Stay now pointless?