Calling time on housing benefit

The majority of goods and services are made available to households through income support payments which are based on notional expenditure on certain necessary goods and services, like food, clothing, utility bills, and transport costs. Other goods, usually defined as "welfare goods" such as health care and education, are provided at the point of need and without direct cost to the recipients. While housing has been provided in the form of a welfare good, support for housing costs is now primarily in the form of a specific allowance which is frequently paid direct to the landlord. Housing costs are thus distinct in being covered partially or totally by a specific allowance. Whatever the reasons might be for the development of separate housing supports, I would suggest that there is no particular reason now why housing should be treated differently from any other necessary good or service. I would propose therefore that housing benefit be abolished and that it be replaced by a notional element to cover housing costs within income support payments.

This proposal would involve increasing income support payments by a notional amount which make a contribution towards the cost of housing costs. Such an allowance should be tenure neutral and thus based on costs across all tenures. A simple version of this proposal would be to arrive at a notional level based on national average housing costs and an agreed proportion, say, 90 per cent, which ought to be covered by subsidy.

However, even in this most simple of systems, the majority of properties would have to be excluded from the calculation as they would not be properties which the poor would generally afford. A reasonable calculation might be based on current local reference rents for the rented sector and mortgage costs based on Right-to-Buy valuations before discount, along with a notional element for maintenance costs. This would give a benchmark figure upon which to base the initial uprating of income support.

But the main problem with this simplistic scheme would still remain; namely that there are considerable disparities in housing costs across the country. This is a phenomena which does not really apply to other areas of expenditure covered by income support. Thus setting a national average would appear over-generous in some areas and some tenures, whilst in others households would struggle to find any reasonable accommodation at all. Those taking a robust view of the operation of markets might suggest that over time there will be an adjustment in housing costs as a result of these payments. This is certainly plausible in the rented sectors, especially if there is no longer any differentiation between the treatment of social and private rented housing. The aim should be to ensure that all landlords, be they social or private, compete against each other on a level playing field. If this could be maintained (and it does imply changes to the allocation mechanisms of social landlords) over time rents would adjust to the levels dictated by the available income of potential tenants. The particular problem here would be the owner occupied market where housing costs would not necessarily fall as they are linked to historic house price values and interest rates. Moreover prices in the lower value sectors of the market can be affected by changes in other parts of the market.

For this reason I would suggest that instead of a notional level being set across the country, it would be more sensible to establish the system based on local housing costs. I would suggest that such a modification be only transitional with the clear aim of shifting towards a single national rate. This could be achieved by a damping mechanism with differential increases in income support. However, a target date for the ending of the transitional system should be announced to ensure that the damping mechanism has the necessary effect on incentives and minimises the propensity of households to move to areas of higher housing costs in order to benefit from an apparently more generous level of support.

A system which not only differentiates by area, but also according to tenure on the grounds that rents in the private sector differ from the social rented sector, has been argued for. This is superficially appealing, but would have the effect of creating incentives for and against particular tenures at the local level. It would merely maintain the current inflexibilities between tenures. I would therefore argue against any such attempt to offer different levels of allowance to different tenures.

I see this proposal of incorporating housing costs into income support payments as having several distinct benefits. First, of course, it will assist in the eradication of the producer capture of personal subsidies by landlords. Payments would not only be direct to the tenant, but would also be ‘hidden’ within a more general allowance. Rents would therefore have to be set according to the ability and preparedness of potential tenants to pay and not on prevailing benefit and subsidy levels. It would thus ensure landlords managed their costs according to the prevailing market conditions, and established a more equitable contractual relationship with their tenants. Tenants would no longer be merely a passport to subsidy, but customers deemed able to exercise choice.

Indeed choice is the second advantage of this scheme. By not tying subsidy to a particular tenure, tenants are given the prospect of choice across all sectors. But also, by incorporating a housing allowance within income support, households would be able to chose how much of their income they wished to commit to housing costs and thus the quality of housing they received.

Housing could be then properly become one choice of many in terms of how the household used its available income. This would be an improvement on current circumstances where the quality and price of accommodation is largely set by the landlord. Households ought to be able to trade off quality and price and the system proposed here is better able to facilitate this.

Third, there is the important point that households become more aware of the real cost of their housing. This, of course, is an important prerequisite if rational choices between available dwellings are to be made.

Payments direct to the landlord ensure that rent levels are a matter of indifference to benefit recipients. Prohibiting the landlord receiving payments direct would ensure that rent levels are relevant to households. This awareness of cost should serve to prevent ‘up-marketing’ and allow a more genuine market to develop.

Payments direct to households makes it clear that they are responsible for their contractual obligations. They would be directly responsible for making payments to their landlord or mortgage lender and would not be able to pass this responsibility onto an impersonal bureaucracy.

Finally, this system of subsidy eradicates the whole issue of tapers and benefit withdrawal which contribute towards the poverty trap by reducing incentives for work. It is thus a system which can be incorporated much more satisfactorily with the soon-to-be introduced Working Families Tax Credit which is likely to be hampered by the effect of the current benefit tapers. Of course, with regard to work incentives more generally, the absolute level of the notional housing allowance would have an effect. Thus this incentive effect will have to be taken into account when setting the notional level.

I have tried to outline the basic principles for the reform of housing benefit and housing subsidies more generally. I seek a system based on demand side subsidies which offers the maximum of choice to households, regardless of tenure, and which reduces the ability of landlords to manipulate subsidies.

There is always a tension in welfare policy between the desire to limit reduce public expenditure on the one hand, and, on the other, an attempt to change the behaviour of households seen as dependent. The two aims are obviously linked, but it is perfectly possible that in some cases dependency can only be cured by additional expenditure, albeit only in the short to medium term. I believe that if one gets the principles right then public expenditure will reduce as households become more self sufficient, as expectations change, and as perverse incentives are eradicated.