Benefit cap: with friends like these, the poor don’t need enemies

Once again, Britain is about to become the Bangladesh of Europe. At least this is the impression one could gather from listening to the poverty lobby and the wider anti-cuts front, including certain clerical figures. This time it’s because of the benefit cap, which limits the sum of out-of-work cash payments a household can receive to a maximum of £26,000.

The cap will affect about 67,000 households, more than half of them in London, and they will, on average, lose £83 per week. Over 13,000 households will see their benefits reduced by £150 per week or more. These figures sound rather steep indeed. But they are also the wrong focus.

What is more relevant is

  1. whether working households on a low pay, but not qualifying for substantial benefit payments, could afford to live in the areas where those affected by the cap currently live.

  2. whether those affected by the cap have a chance of avoiding the consequences.

The answer to the first question is mostly no. Take the case of a single adult working 40 hours a week at the minimum wage, ending up with an annual gross market income of £12,650. They may qualify for a symbolic amount of Working Tax Credit, but it won’t be enough to recover their income tax and national insurance payments (i.e. the kind of welfare churning which is effectively just a make-work scheme for those who administer it). This means that if they do not qualify for Housing Benefit, a one-bedroom flat in inner London is out of that person’s reach. The corresponding HB rate for most of inner London, which is indicative of rents in the lower third of the price spectrum, is already at £240 per week or above.

As for the second question, the answer is yes. It is very difficult to amass benefit payments in excess of £26,000 unless one lives in the most expensive high-rent pockets of the country. In which case a sensible response would be to move out of this pocket, which, contrary to the claims of the opponents, does not mean moving into “distant dumping grounds where nobody wants to live because there is no work”.

Take the case of a single parent with three children, who qualifies for Child Tax Credit, Child Benefit, Jobseekers’ Allowance or Income Support, and Council Tax Benefit. Adding these payments, we are in the neighbourhood of £16,000, which still leaves £10,000 before the cap is reached. That fully covers the Housing Benefit rate in most of London’s commuter belt, for example Harlow & Stortford (£196 per week), South West Essex (£185), Chelmsford (£179) or North West Kent (£156).

In short, taking house prices as given, there is nothing draconian about the cap. Of course it’s far from ideal if people have to move because they can no longer afford to live where they are currently living. But how about those who never were able to move into these neighbourhoods in the first place?

There is still one sensible point which the cap critics are making: People who receive benefits in excess of £26,000 are not leading luxurious lives. They simply live in areas where rents have spiralled out of control, which is barely their fault. If we had a functioning housing market, we would never be debating this cap, because it would be next to impossible to accumulate more than £26,000 in benefit payments.

But while this is a fair and sensible point to make – where were all these groups who are now fighting the benefit cap when the coalition did try to address the root cause of the housing cost explosion last summer? Where were they when the coalition timidly embraced planning reform, and a phalanx of nimby organisations launched a blitz against their proposals? Did they rush in to defend the plans, exposing the nimby lobby’s phoney arguments for the nonsense that they are? Of course not. They did not even take notice of the planning debate, because it does not involve their pet topic: benefits.

And guess which newspaper played an especially inglorious role in this debate, teaming up with wealthy homeowners to prevent affordable housing, while now indulging in attacks against the benefit cap (hint: see here, here and here).

With friends like these, low income groups in this country don’t need enemies.

Dr Kristian Niemietz is the IEA's Head of Political Economy. Kristian studied Economics at the Humboldt Universität zu Berlin and the Universidad de Salamanca, graduating in 2007 as Diplom-Volkswirt (≈MSc in Economics). During his studies, he interned at the Central Bank of Bolivia (2004), the National Statistics Office of Paraguay (2005), and at the IEA (2006). He also studied Political Economy at King's College London, graduating in 2013 with a PhD. Kristian previously worked as a Research Fellow at the Berlin-based Institute for Free Enterprise (IUF), and taught Economics at King's College London. He is the author of the books "Socialism: The Failed Idea That Never Dies" (2019), "Universal Healthcare Without The NHS" (2016), "Redefining The Poverty Debate" (2012) and "A New Understanding of Poverty" (2011).

4 thoughts on “Benefit cap: with friends like these, the poor don’t need enemies”

  1. Posted 30/01/2012 at 22:11 | Permalink

    Some good points here.

    However, I’d like to point out that perhaps that the solution to/reason for high housing cost is perhaps not quite as one-dimensional as Kristian Niemietz suggests.

    Even with the current green belt/countryside planning laws there seems no fundamental reason why housing should be as expensive as it is. Housing costs exploded due to the credit/asset price boom under the last Labour government (I’m not saying that Tory governments are necessarily much better) as much as it did due to a housing shortage. This really hasn’t fully unwound (yet) because of very low interest rates.

    Secondly, additional housing should not necessarily mean more undeveloped land to build on. London has just half the population density of Paris. I know that some of this is due to the parks that make London generally a much more pleasant city to live in, but it makes little sense to ‘build out’ when the more obvious answer is perhaps to ‘build in/build up’. There would be far more incentive to do this if commuter travel wasn’t subsidised, but I’m still bemused as to why this doesn’t already happen more in London. Can anyone explain?

  2. Posted 30/01/2012 at 22:22 | Permalink

    Let me make three comments. First, a single 40 year old, earning £12,650 does only get a token amount of tax credits, but they ARE able to claim housing benefit. They will get approx £170 a week – and in total they will get just over £9,000 in benefits. Taking into account tax and NI and they have over £20,000 to live on. That is £384 a week. Whether they can live in central London on that amount – where rents are £240 for a cheap one bed is ambiguous, but they certainly get the pick of most of the “nice” suburbs.

    Second, a couple with 3 kids is hit much harder than a single parent by the changes. A single parent with 3 kids will be affected, but not much. One of the problems with the policy is that it gives dad a really big incentive to leave (ideally taking up to three children with him…) That makes no sense.

    Finally, I have strenuously supported changing the planning system.

  3. Posted 31/01/2012 at 11:44 | Permalink

    @HJ: I’m not just referring to the Green Belt, but to buidling restrictions in general, including height restrictions. I’d like to see a planning system in which people observe the cost of blocking development, so that nimbyism becomes expensive for themselves. In that system, people would stop asking themselves “how can I stop development?”, and start asking themselves “what type of developement would I mind least?”. If there was a strong desire to maintain green fields, but less resistance to having views obstructed, then there would be more upward and less outward building. But that remains to be seen, it could also turn out the other way round. The problem is that we cannot find out in the current system. It’s cheap and easy to join a signature campaign, or express a distaste for developemnt in a survey.

    @Tim: Point on HB is well taken, and yes, the cap is an extremely crude instrument. Presumably, a cap expressed in terms of equivalised income rather than face-value income would have enabled larger savings while dispersing the impact more evenly. Plus, the implicit rent subsidy in social housing should have been counted as part of income.
    I know that on planning, we’re on the same page, I enjoyed your paper ‘In My Back Yard’.

  4. Posted 31/01/2012 at 14:03 | Permalink

    The case of a 40 year old single adult earning £12,650 is instructive in terms of the poisonous effect Housing Benefit has on work incentives in high rent areas. If indeed they were renting a one bedroom flat in one of the less cheap parts of London for £240 per week, it would be pretty pointless for them to get a job in the first place (or to seek another low-paid job if they lost their existing one). Using a rough calculation, and including council tax benefit, they would only be around £50 per week better off in work, and this is before travel and other in-work costs. Once travel costs etc. are factored in, they would probably be working for a marginal income of perhaps 50p per hour. No wonder rates of ‘worklessness’ are so high in Hackney and Tower Hamlets.

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