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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Jeremy Corbyn supporters should stop excusing Labour’s anti-immigration drift

The Labour leader is a passionate defender of migrants’ rights – Brexit shouldn’t distract the new left movement from that.

Something strange is happening on the British left – a kind of deliberate collective amnesia. During the EU referendum, the overwhelming majority of the left backed Remain.

Contrary to a common myth, both Jeremy Corbyn and the movement behind him put their weight into a campaign that argued forcefully for internationalism, migrants’ rights and regulatory protections.

And yet now, as Labour’s policy on Brexit hardens, swathes of the left appear to be embracing Lexit, and a set of arguments which they would have laughed off stage barely a year ago.

The example of free movement is glaring and obvious, but worth rehashing. When Labour went into the 2017 general election promising to end free movement with the EU, it did so with a wider election campaign whose tone was more pro-migrant than any before it.

Nonetheless, the policy itself, along with restricting migrants’ access to public funds, stood in a long tradition of Labour triangulating to the right on immigration for electorally calculated reasons. When Ed Miliband promised “tough controls on immigration”, the left rightly attacked him.  

The result of this contradiction is that those on the left who want to agree unequivocally with the leadership must find left-wing reasons for doing so. And so, activists who have spent years declaring their solidarity with migrants and calling for a borderless world can now be found contemplating ways for the biggest expansion of border controls in recent British history – which is what the end of free movement would mean – to seem progressive, or like an opportunity.

The idea that giving ground to migrant-bashing narratives or being harsher on Poles might make life easier for non-EU migrants was rightly dismissed by most left-wing activists during the referendum.

Now, some are going quiet or altering course.

On the Single Market, too, neo-Lexit is making a comeback. Having argued passionately in favour of membership, both the Labour leadership and a wider layer of its supporters now argue – to some extent or another – that only by leaving the Single Market could Labour implement a manifesto.

This is simply wrong: there is very little in Labour’s manifesto that does not have an already-existing precedent in continental Europe. In fact, the levers of the EU are a key tool for clamping down on the power of big capital.

In recent speeches, Corbyn has spoken about the Posted Workers’ Directive – but this accounts for about 0.17 per cent of the workforce, and is about to be radically reformed by the European Parliament.

The dangers of this position are serious. If Labour’s leadership takes the path of least resistance on immigration policy and international integration, and its support base rationalises these compromises uncritically, then the logic of the Brexit vote – its borders, its affirmation of anti-migrant narratives, its rising nationalist sentiment – will be mainlined into Labour Party policy.

Socialism in One Country and a return to the nation state cannot work for the left, but they are being championed by the neo-Lexiteers. In one widely shared blogpost on Novara Media, one commentator even goes as far as alluding to Britain’s Road to Socialism – the official programme of the orthodox Communist Party.

The muted and supportive reaction of Labour’s left to the leadership’s compromises on migration and Brexit owes much to the inept positioning of the Labour right. Centrists may gain personal profile and factional capital when the weaponising the issue, but the consequences have been dire.

Around 80 per cent of Labour members still want a second referendum, and making himself the “stop Brexit” candidate could in a parallel universe have been Owen Smith’s path to victory in the second leadership election.

But it meant that in the summer of 2016, when the mass base of Corbynism hardened its factional resolve, it did so under siege not just from rebelling MPs, but from the “Remoaners” as well.

At every juncture, the strategy of the centrist Labour and media establishment has made Brexit more likely. Every time a veteran of the New Labour era – many of whom have appalling records on, for instance, migrants’ rights – tells Labour members to fight Brexit, party members run a mile.

If Tony Blair’s messiah complex was accurate, he would have saved us all a long time ago – by shutting up and going away. The atmosphere of subterfuge and siege from MPs and the liberal press has, by necessity, created a culture of loyalty and intellectual conformity on the left.

But with its position in the party unassailable, and a radical Labour government within touching distance of Downing Street, the last thing the Labour leadership now needs is a wave of Corbynite loyalty-hipsters hailing its every word.

As the history of every attempt to form a radical government shows, what we desperately need is a movement with its own internal democratic life, and an activist army that can push its leaders as well as deliver leaflets for them.

Lexit is no more possible now than it was during the EU referendum, and the support base of the Labour left and the wider party is overwhelmingly in favour of free movement and EU membership.

Jeremy Corbyn, John McDonnell and Diane Abbott are passionate, principled advocates for migrants’ rights and internationalism. By showing leadership, Labour can once again change what is electorally possible.