What will happen when the High Court sees the human face of the benefit cap?

The benefit cap is another Coalition policy that, advertised as creating fairness, targets the most vulnerable. These families illustrate the living truth behind the Coalition's rhetoric.

Maria and her children have been in temporary accommodation for five years, after they became homeless in 2008. Her youngest is one year old and there’s four of them now crammed into a flat in London. The place smells of damp and she tells me it’s infested with rodents. She’s paying almost £400 a week for this.

The benefit cap – the policy, introduced nationally in July, that sees a ‘cap’ of £500 per week in benefits per household – means that this rent now takes up almost all of the money she has coming in. She’s been left with £2.98 for each of them per day to pay for food, clothes, heating and electrics.

Maria is one of six claimants from three families who this month have challenged the lawfulness of the benefit cap, forcing the Government into a judicial review at the High Court. The benefit cap is another Coalition policy that, advertised as creating fairness, targets the most vulnerable. The £500 limit applies to lone parents and couples equally, including those like Maria who are caring for a pre-school child alone (and therefore judged by the Government as not having to be in employment), and takes no account of the number of children or other dependents in the family. Vulnerable families often have higher housing because they live in temporary accommodation and are therefore both more likely to be affected by the cap than other families, and less able to take steps to avoid or mitigate its effects.

Maria is a refugee, having fled Poland to England after suffering persecution for being Roma and Roman Catholic. She was denied schooling as a child due to the widespread discrimination against the Roma community and is now unable to read or write. Maria’s husband has left her, living nearby with their fourth child, their 12 year old daughter, and she is heavily reliant on her church and relatives who live locally. She has no choice but to remain in London.

“I want to stay near the children’s father, my daughter, and the boy’s schools if at all possible,” Maria says. “I’ve been trying to get cheaper accommodation for many years but without success.”

The waiting list for a council house for her family size in her area is ten years.

With her benefits capped but with no way to increase her income or reduce her rent, Maria’s left trying to provide for a family of five on £104.50 a week. If they were asylum seekers, the Government would count the family as destitute.

“I was surprised to learn in the course of preparing the legal challenge to the benefit cap that some of my clients would be left with so little money to live on that if they were asylum seekers they would be considered destitute,” Rebekah Carrier, the solicitor representing the claimants tells me. The asylum seeker rate assumes this is a short-term situation and not a level people are expected to live at permanently, she adds. "And they don't include light, heat, water rates and council tax, none of which would be payable by a failed asylum seeker. It's astonishing that the benefit cap leaves families with even less money than those the government only gives the very minimum needed to survive." 

“I find managing my day to day affairs difficult because of my illiteracy but I care very much about being in debt,” Maria tells me. “I know that if I get into debt I won’t be able to get out of it. The idea of debt mounting at £180 a week or more is terrifying to me.”

Before the judicial review was issued and her housing association reduced her rent, she was paying £525 per week. The policy was leaving the family with minus £25 to live.

The cap is making no more financial sense for the Government than the people affected. As George Eaton pointed out for the New Statesman last week, the policy’s costing nearly as much to manage as it’s saving, and there is little evidence that it’s achieving its stated aim of moving claimants into work (just 74 of the 740 households affected have found work). Indeed, for a policy wrapped around the tag "no out-of-work family should receive more in benefits than the average family receives from going out to work", it even penalises people who are in part-time employment (but who don’t receive Working Tax Credit).

Still, this is a popular policy. A YouGov poll published earlier this year found that 79% of people support the cap. Just 12% were opposed.

“I think that people don’t understand that the benefit cap hits people like me,” Rachel says.

Rachel was abused by her husband and after many years of violence fled the family home. She now lives with three of her children in a two bed flat. It’s another poor quality, overcrowded London flat but the benefit cap means she’s struggling to pay the private rent even for something this size.

“I’m terrified the landlord will evict me,” she says. “My children have already experienced a lot of disruption in their lives. I’m trying my best to help them to settle in a new environment and make sure that they get the things that children need. I can’t move anywhere smaller as I already don’t have enough room.”

She has two other children. Her eldest daughter, 17, developed mental health problems related to her father’s abusive behaviour to her and her mother and is currently in foster care nearby. Rachel’s 12 year old son was abducted by his father but a court order means it’s likely he’ll soon be returned to her. It will see one adult and six children living in a two-bed flat. 

“I don’t know what I will do if my two older children come back to live with me as there is nowhere for them to sleep,” Rachel says.

Because the cap is set at a fixed rate regardless of family size, Rachel will have no additional benefits if her son and daughter are returned to her.

“I can’t really imagine how I will feed and clothe them,” she says.

“The local authority are paying in the region of £600 to keep [Rachel’s daughter] in care, but if she returns home, her mother will receive not a penny in benefits to support her. This could mean she has to remain in care,” Carrier tells me.“If this sort of catastrophic effect on family life is the intended consequence of the benefit cap, this should be made clear,” she adds.

The fact that women like Rachel are likely to be pushed further into a vulnerable position by the cap suggests unintended disastrous effects of the policy spread widely. Someone escaping domestic violence will often have higher housing costs through having to live in women’s refugees. They may also be receiving additional housing benefit because they’ve recently fled their family home.

“It’s absolutely vital that women know they’ll be able to go to somewhere safe and stable when leaving a violent relationship,” Polly Neate, Chief Executive at Women’s Aid says. “The benefit cap puts women at further risk when they are already incredibly vulnerable by making it impossible to keep hold of their own homes, by making it harder for refuges to offer places, and by making it harder to house and feed their children when they try to live independently.”

She tells me many refuge services will be settling their budgets soon for the next financial year but this process will be difficult without knowing what the housing benefit rules will be. “Many services are becoming increasingly anxious about their ability to provide much-needed services,” she says.

Sarah and her three daughters fled horrific violence from the children’s father. They’ve moved six times, twice to women’s refuges, before a court order allowed them to return to their family home. It’s a two bed flat. Two of the girls share a box room and the other sleeps with her mother.

Sarah’s ex-husband has been coming to the home against court orders and social services have made it clear they may take the children into care if the family stays where they are. The benefit cap means moving is financially impossible.

“If I move, I’ll almost certainly have to move to more expensive accommodation leaving me less money to feed and clothe my children,” Sarah says. “If I don’t move, social services may take action to remove my children, and I don’t know if I’ll have to move in the future to be safe from my husband as he’s breached the order preventing him from coming to my home.”

When we speak, Sarah talks to me through the anonymity of her solicitor due to the fear of being identified. Her children witnessed the violence and have been further traumatised by their time in temporary accommodation. If the family is forced to leave their flat, they’ll be back going between hostels, guesthouses and refuges. Their housing costs will only increase.

Sarah knows at this point her only hope is the judicial review. 

“I can’t work to avoid the effect of the cap because I need to be able to care for my children and with little backup,” she says. “I feel it’s particularly important for me to be there for my children, caring for my three year old…during the day and being there for the older girls in the holidays and after school. They’re both less confident and independent than their peers [after what they’ve seen].”

“I feel that I’m in an impossible situation,” Sarah says. “I can’t imagine how I’ll manage to live on the reduced income.”

If Sarah went back to the girls’ abusive father, because he works, they would automatically escape the benefit cap.

She is now waiting, like the other claimants and the people they represent, to see if the High Court will give her another way to feed her children.

Names have been changed.

The benefit cap is stifling social mobility. Image: Getty

Frances Ryan is a journalist and political researcher. She writes regularly for the Guardian, New Statesman, and others on disability, feminism, and most areas of equality you throw at her. She has a doctorate in inequality in education. Her website is here.

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We're racing towards another private debt crisis - so why did no one see it coming?

The Office for Budget Responsibility failed to foresee the rise in household debt. 

This is a call for a public inquiry on the current situation regarding private debt.

For almost a decade now, since 2007, we have been living a lie. And that lie is preparing to wreak havoc on our economy. If we do not create some kind of impartial forum to discuss what is actually happening, the results might well prove disastrous. 

The lie I am referring to is the idea that the financial crisis of 2008, and subsequent “Great Recession,” were caused by profligate government spending and subsequent public debt. The exact opposite is in fact the case. The crash happened because of dangerously high levels of private debt (a mortgage crisis specifically). And - this is the part we are not supposed to talk about—there is an inverse relation between public and private debt levels.

If the public sector reduces its debt, overall private sector debt goes up. That's what happened in the years leading up to 2008. Now austerity is making it happening again. And if we don't do something about it, the results will, inevitably, be another catastrophe.

The winners and losers of debt

These graphs show the relationship between public and private debt. They are both forecasts from the Office for Budget Responsibility, produced in 2015 and 2017. 

This is what the OBR was projecting what would happen around now back in 2015:

This year the OBR completely changed its forecast. This is how it now projects things are likely to turn out:

First, notice how both diagrams are symmetrical. What happens on top (that part of the economy that is in surplus) precisely mirrors what happens in the bottom (that part of the economy that is in deficit). This is called an “accounting identity.”

As in any ledger sheet, credits and debits have to match. The easiest way to understand this is to imagine there are just two actors, government, and the private sector. If the government borrows £100, and spends it, then the government has a debt of £100. But by spending, it has injected £100 more pounds into the private economy. In other words, -£100 for the government, +£100 for everyone else in the diagram. 

Similarly, if the government taxes someone for £100 , then the government is £100 richer but there’s £100 subtracted from the private economy (+£100 for government, -£100 for everybody else on the diagram).

So what implications does this kind of bookkeeping have for the overall economy? It means that if the government goes into surplus, then everyone else has to go into debt.

We tend to think of money as if it is a bunch of poker chips already lying around, but that’s not how it really works. Money has to be created. And money is created when banks make loans. Either the government borrows money and injects it into the economy, or private citizens borrow money from banks. Those banks don’t take the money from people’s savings or anywhere else, they just make it up. Anyone can write an IOU. But only banks are allowed to issue IOUs that the government will accept in payment for taxes. (In other words, there actually is a magic money tree. But only banks are allowed to use it.)

There are other factors. The UK has a huge trade deficit (blue), and that means the government (yellow) also has to run a deficit (print money, or more accurately, get banks to do it) to inject into the economy to pay for all those Chinese trainers, American iPads, and German cars. The total amount of money can also fluctuate. But the real point here is, the less the government is in debt, the more everyone else must be. Austerity measures will necessarily lead to rising levels of private debt. And this is exactly what has happened.

Now, if this seems to have very little to do with the way politicians talk about such matters, there's a simple reason: most politicians don’t actually know any of this. A recent survey showed 90 per cent of MPs don't even understand where money comes from (they think it's issued by the Royal Mint). In reality, debt is money. If no one owed anyone anything at all there would be no money and the economy would grind to a halt.

But of course debt has to be owed to someone. These charts show who owes what to whom.

The crisis in private debt

Bearing all this in mind, let's look at those diagrams again - keeping our eye particularly on the dark blue that represents household debt. In the first, 2015 version, the OBR duly noted that there was a substantial build-up of household debt in the years leading up to the crash of 2008. This is significant because it was the first time in British history that total household debts were higher than total household savings, and therefore the household sector itself was in deficit territory. (Corporations, at the same time, were raking in enormous profits.) But it also predicted this wouldn't happen again.

True, the OBR observed, austerity and the reduction of government deficits meant private debt levels would have to go up. However, the OBR economists insisted this wouldn't be a problem because the burden would fall not on households but on corporations. Business-friendly Tory policies would, they insisted, inspire a boom in corporate expansion, which would mean frenzied corporate borrowing (that huge red bulge below the line in the first diagram, which was supposed to eventually replace government deficits entirely). Ordinary households would have little or nothing to worry about.

This was total fantasy. No such frenzied boom took place.

In the second diagram, two years later, the OBR is forced to acknowledge this. Corporations are just raking in the profits and sitting on them. The household sector, on the other hand, is a rolling catastrophe. Austerity has meant falling wages, less government spending on social services (or anything else), and higher de facto taxes. This puts the squeeze on household budgets and people are forced to borrow. As a result, not only are households in overall deficit for the second time in British history, the situation is actually worse than it was in the years leading up to 2008.

And remember: it was a mortgage crisis that set off the 2008 crash, which almost destroyed the world economy and plunged millions into penury. Not a crisis in public debt. A crisis in private debt.

An inquiry

In 2015, around the time the original OBR predictions came out, I wrote an essay in the Guardian predicting that austerity and budget-balancing would create a disastrous crisis in private debt. Now it's so clearly, unmistakably, happening that even the OBR cannot deny it.

I believe the time has come for there be a public investigation - a formal public inquiry, in fact - into how this could be allowed to happen. After the 2008 crash, at least the economists in Treasury and the Bank of England could plausibly claim they hadn't completely understood the relation between private debt and financial instability. Now they simply have no excuse.

What on earth is an institution called the “Office for Budget Responsibility” credulously imagining corporate borrowing binges in order to suggest the government will balance the budget to no ill effects? How responsible is that? Even the second chart is extremely odd. Up to 2017, the top and bottom of the diagram are exact mirrors of one another, as they ought to be. However, in the projected future after 2017, the section below the line is much smaller than the section above, apparently seriously understating the amount both of future government, and future private, debt. In other words, the numbers don't add up.

The OBR told the New Statesman ​that it was not aware of any errors in its 2015 forecast for corporate sector net lending, and that the forecast was based on the available data. It said the forecast for business investment has been revised down because of the uncertainty created by Brexit. 

Still, if the “Office of Budget Responsibility” was true to its name, it should be sounding off the alarm bells right about now. So far all we've got is one mention of private debt and a mild warning about the rise of personal debt from the Bank of England, which did not however connect the problem to austerity, and one fairly strong statement from a maverick columnist in the Daily Mail. Otherwise, silence. 

The only plausible explanation is that institutions like the Treasury, OBR, and to a degree as well the Bank of England can't, by definition, warn against the dangers of austerity, however alarming the situation, because they have been set up the way they have in order to justify austerity. It's important to emphasise that most professional economists have never supported Conservative policies in this regard. The policy was adopted because it was convenient to politicians; institutions were set up in order to support it; economists were hired in order to come up with arguments for austerity, rather than to judge whether it would be a good idea. At present, this situation has led us to the brink of disaster.

The last time there was a financial crash, the Queen famously asked: why was no one able to foresee this? We now have the tools. Perhaps the most important task for a public inquiry will be to finally ask: what is the real purpose of the institutions that are supposed to foresee such matters, to what degree have they been politicised, and what would it take to turn them back into institutions that can at least inform us if we're staring into the lights of an oncoming train?