The rise in housing benefit is driven by a rise in need. No more, no less

It's not greed, it's not fraud, it's just more people needing help to live their lives, writes Declan Gaffney.

It’s safe to say that housing benefit has few defenders on any side of the political debate.

All parties agree that spending is out of control and needs to be reined in. The right has ruthlessly promoted the claim that housing subsidises the underserving poor to live in accommodation ordinary workers couldn’t afford. The left responds by saying that it is landlords rather than tenants who are milking the system. Thus Owen Jones writes:

Greedy landlords are fully aware that most cannot afford to pay their extortionate rents. But they also know that the taxpayer will step in and subsidise them with housing benefits… Instead of wasting billions on housing benefit, we could spend it on building housing, creating jobs and stimulating the economy.

What the left and right criticisms have in common is more important than what distinguishes them. Housing benefit exemplifies the gruesome two-step of current welfare debate.

  • Step one: claim that expenditure is at unprecedented and unsustainable levels.
  • Step two: blame this on some unpopular group milking the system—greedy landlords or irresponsible tenants—thus suggesting that expenditure can be cut or redirected to other purposes without pain.

Step two is wishful thinking, as I’ll argue below. Step one is easily dealt with. Look at this chart:

 

The green curve shows expenditure on housing benefit as a share of GDP, indexed to 1978/9, from that year to 2011/12. (It’s the share of GDP that counts when the sustainability of expenditure is at issue.) Spending now, four years after the onset of recession, is at almost exactly the same level as it was in 1995/6 four years after the last recession. In the intervening period it first fell dramatically as the impact of the early 90’s recession receded, then rose sharply when the global financial system collapsed in 2008/9. There has been no long-term upward trend since the early 1990's, so the rhetoric of unsustainability is completely misplaced.

The red curve on the chart, which takes out the effect on expenditure of changes in the number of claimants, shows that the recent rise in expenditure is overwhelmingly driven by the caseload (the dotted blue curve). It also allows us to see the impact of the switch from supply-side to demand-side funding during the late 1980s — that is, the switch from directly subsidising social rents and building homes to giving tenants the money to pay higher rents.

This doesn’t represent a change in overall expenditure but a redirection of subsidy to a different channel.1 The impacts of that switch, particularly on work incentives and poverty traps for lower income groups, have been hotly debated, but the point here is that this step change in housing benefit spending doesn’t represent an additional cost to taxpayers (except in the form of any negative impacts on employment). So even in this long-term perspective the notion that housing benefit represents an increasing burden on the Exchequer is wrong.

What about the other item on the charge sheet—that housing benefit expenditure is wasteful because either landlords or tenants are milking the system on a grand scale? Both these claims, if we are to make sense of them, involve similar economic assumptions.

To see this, consider how landlords might be able to raise rents above market level to capture the subsidy—bearing in mind that if rents aren’t above market level, there is no subsidy (left critics have been surprisingly uninterested in demonstrating this). The private rented market is dominated by small-scale, uncoordinated cottage industry operations, so we can rule out the notion that landlords are using market power to drive up rents. (An exception, but a small element in total spending, may be the market in temporary accommodation for people meeting local authority homelessness criteria).

The other possibility would be if tenants were to some extent indifferent to rent levels. That could allow landlords to use price discrimination (charging more to housing benefit claimants) to extract above-market rents from taxpayers. Alternatively, even if landlords didn’t use price discrimination, tenants might choose more desirable (expensive) properties if they weren’t worried about the rent—the government’s main argument for cutting entitlements. Thus the greedy landlord and irresponsible tenant stories turn on the same explanatory mechanism of tenants failing to respond to prices: they differ only in who is said to be extracting the unfair advantage.

Which raises the question: why would tenants be indifferent to rents? The higher the rent level, the more earned income will be subject to punitive marginal tax rates as housing benefit is withdrawn. You would have to suffer from extreme myopia or have minimal expectations of your future earning capacity not to take this into account in choosing accommodation. Add to this that about half of private rented sector claimants were living in their current accommodation before they made their claim, so they would have been making the same tradeoffs as anybody else when they chose where to live.2

Fortunately, all this can tested empirically.

London has the largest private rented sector in the country, a highly mobile population, substantial variations in rents between areas and (although Londoners hate to admit it) an excellent public transport system.

If housing benefit tenants care about rent levels, we would expect them to be in lower rent areas, subject of course to the availability of accommodation. If they didn’t care, we would expect them to be distributed across areas in accordance with the rental stock.

When a model in which the number of private sector claimants in each borough in 2010-11 is measured against (a) the size of the local private rented sector and (b) the lower 25 per cent of local rents, we find the latter "explains" 66 per cent of the variation in caseload between areas. Overall, a 1 per cent increase in rents implies a 1.7 per cent decrease in the number of claimants.3

Given this strong negative relationship between rent levels and private sector HB claims, the notion that landlords are capturing a large part of the subsidy by charging above market rents looks implausible.

This is even more the case when we look at what’s happened in London since the cuts to housing benefit in April 2011. Using the same model with post-reform data, there is no statistically significant change in the relationship between rents and caseload: even quite dramatic cuts to entitlements don’t seem to have made that much difference to the already very strong propensity for higher rents to drive down the number of claimants.

(This isn’t to say there has been no effect from the changes, but that if there has been, it’s small by comparison with what was already happening before they took place.)

At the same time, between 2011 and 2012, rents rose by 8 per cent in London, and they rose most for the type of larger property where the cuts had the most impact on tenants’ ability to pay—rents for three- and four-bed flats have risen by more than 10 per cent. So much for the government’s claims that rents are falling in response to the cuts

Given how much we spend on housing benefit in the private rented sector it would be surprising if there were no landlords taking advantage. But the hard lesson is that this probably has little impact on overall spending levels. Claims from the left that billions are being wasted "subsidising" private landlords are about as convincing as claims from the right that billions are being wasted subsidising irresponsible tenants to live in mansions.

There’s a longstanding debate about the merits of funding housing through demand rather than supply-side subsidy. (For a fair statement of the argument, see Shelter’s report). But suggesting that there’s a free pot of money available for housing investment in the form of subsidy captured by greedy landlords adds nothing to that debate.

If we want more housing investment, we’re going to have to pay for it some other way: perhaps by borrowing as Jonathan Portes has suggested. Taking that route would also have positive impacts on employment, thus reducing expenditure on housing benefit without hitting the incomes of struggling workers. But the welfare reform two-step is a distraction from the real issues, whether you lead with the right or the left.

1 See page 55 here.

2 See section 6.2 here.

3 Geek note: all variables in logarithms, all p-values <.01. The results are not driven by multi-collinearity between the independent variables.

A housing estate in Lambeth. Photograph: Getty Images

Declan Gaffney is a policy consultant specialising in social security, labour markets and equality. He blogs at l'Art Social

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Banishing safe seats, and other proposals to bridge the democratic divide

How to improve key areas of democracy.

Labour’s election train is finally pulling into the station, with its new leader announced in just over a fortnight. However, a summer absorbed in the party’s internal democracy has obscured a deeper truth confronting the country: the general election confirmed that unequal political participation rates in the UK – by age, class, ethnicity and region– have become increasingly hardwired into how our democracy operates.

IPPR’s new report underscores the scale of the democratic divide.  For example, less than half of 18-24 year olds voted, compared to nearly four-fifths of the over-65s, while three-quarters of "AB" individuals cast a ballot, against just over half of "DE" registered voters. Critically, this marks a sharp rise in turnout inequality over time. In 1987, for example, turnout rates by class were almost identical but have steadily diverged since.

Similarly, age-based differences have got significantly worse over time. In 1964 turnout for 18-24 year olds was 76.4 per cent, almost matching the 76.7 per cent turnout rate of those aged 65 or over. By 2005 only 38.2 per cent of 18-24 year olds voted against 74.3 per cent of 65+ year olds, with only a very slight improvement this year.

Underlying growing disparities of electoral voice are striking divergences in perceptions of the fairness and effectiveness of our democracy. For example, IPPR/YouGov polling suggests a striking 63 per cent of "DE" individuals think that our democratic system serves their interests badly, while "AB" voters are evenly split.

Given these signs of democratic distress, there remains a strong case for establishing a wide-ranging constitutional convention to reset how our democracy operates. Yet Westminster shows no appetite for such constitutional reformation, and there would only be so much a civil society-led convention could achieve in terms of practical change.

In our report we therefore propose a series of achievable reforms that could update the civic, institutional and technological architecture of our democracy in the here and now, with the explicit goal of ensuring that all voices are better heard in the political process.

On electoral reform, while we reiterate our support for proportional representation for national elections, we know this simply isn’t going to happen this Parliament. We had a referendum on change in 2011 and it was heavily lost. The energies of electoral reformers should therefore focus on extending PR in local government, where it is more obviously in the self-interest of the major parties, as a means of extending their geographical reach.

In addition, the reduction in the number of MPs provides an opportunity to chip away at the number of safe seats. More than half of seats are "safe", a number that has grown over time, even allowing for the electoral earthquake in Scotland. Safe seats typically have lower levels of participation, lower turnout rates, and less electorally powerful voters. While safe seats will always be with us in a first-past-the-post system, too many can be damaging to democracy.

Given this, we have recommended that the various Boundary Commissions of the UK be given a new duty to consider the electoral competitiveness of seats – ie. to tilt against the creation of safe seats – when boundaries are redrawn. The priority would be to meet their current duties of ensuring the geographic coherence of a seat and roughly equal electorates.

However, where these duties can be met we suggest that the Commissions should consider revising boundaries to reduce the number of safe seats, as a step to increasing participation and the voting power of the average elector. Of course, this will clearly not "abolish" all safe seats – nor should it  but it could help re-empower millions of voters currently with little meaningful say over the outcome of elections and force political parties to up their game in safe seats.

At the same time, the transition to the individual electoral registration process risks excluding millions from the franchise, people who are disproportionately younger, poorer or from an ethnic minority. For example, there are clear inequalities by age and ethnicity in terms of who is registered to vote: in the 2010 general election, for which figures are most accurate, 90 per cent of people aged 55-64 were registered, compared to 55 per cent of those aged 18-24, while nearly 20 per cent of BME individuals were not registered to vote, compared to only 7 per cent of the "white British" population.

There are simple steps the government could take to ensure all who are eligible are able to vote: extending the registration deadline to December 2016, and making support available to local authorities to assist registration efforts, weighted towards authorities with higher levels of under-registration, could help reduce inequalities.  In the longer term, electoral registration officers should be given new duties, and the Electoral Commission more powers, to drive up registration rates, with a particular focus on presently under-registered demographics. 

Finally, we recommend introducing a Democracy Commission. At present, the Electoral Commission effectively regulates elections and party funding. Democracy, however, is far richer and broader than electoral processes. It is about formal representation, but also about participation and deliberation, in what Marc Stears has called "everyday democracy".

A statutorily independent Democracy Commission could give institutional ballast to the latter and help reinvigorate democratic life by providing research, resources and capacity-building to facilitate local, civil society-led initiatives that aim to increase broad-based levels of powerful democratic participation or deliberation in collective decision-making processes.

For example, a Democracy Commission could work with the GLA to introduce participatory budgeting in London, assist the Greater Manchester Combined Authority in instituting a public deliberative body with real teeth over how to integrate health and social care in the area, help the Scottish government conduct citizens’ juries on the future constitutional shape of the country, or support civil-society experiments to bring people closer to collective political decision-making processes in their locality.

We are living in a paradoxical political era, where growing political inequality is accompanied by ongoing social and technological change that has the capacity to collapse unnecessary political and economic hierarchies and build a more inclusive, participatory and responsive democracy. However, there is no guarantee that the age of the network will necessarily lead to democratic revival. The institutions and technologies of our political system, products of the 19th century, are struggling in the fluidity and fracture of the 21st century, inhibiting democratic renewal.

With our economy post-industrial, our ways of communicating increasingly digital and more networked, our identities and relationships ever more variegated and complex, it is therefore critical public policy seeks to update the democratic infrastructure of the UK, and, in so doing, help reverse entrenched political inequality.

Such an agenda is vital. If we simply accept the current institutional arrangements of our political system as the limits of our ambition, we must also content ourselves to live in a divided – and therefore inherently partial – democracy. Yet our democracy is not immutable but malleable, and capable of being reformed for the better; reform today can make democratic life more equal. After all, the story of British democracy’s evolution is one of yesterday’s impossible becoming today’s ordinary.

Mathew Lawrence is a research fellow at IPPR and the co-author of "The Democracy Commission: Reforming democracy to combat political inequality". He tweets at @dantonshead.