Cutting £12bn from the welfare bill? Easy as pie. Here’s how
30 March 2015
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Regulation
27 March 2015
Tax and Fiscal Policy
31 March 2015
Economic Theory
11 November 2024
There has been a lot of speculation about where the Conservatives’ headline £12bn of welfare savings should come from. I suspect that the party’s unwillingness to provide any details on this is not just explained by the proximity to the election. Had there been an election in, say, 2012, the governing parties (and perhaps the opposition parties as well) would probably have been a lot more open about their spending plans than they are now. But something in the political dynamics of welfare savings has changed since the coalition’s early years.
In their first budgets and autumn statements, as well as in the comprehensive spending review, the coalition was able to make a few sizeable savings simply by playing around with the formulas by which transfer rates are set. A change from RPI-uprating to CPI-uprating, a few temporary freezes, a change in some reference value, and Bob was their uncle.
As long they can hide behind formulas, politicians can afford to be relatively open about ‘where the axe should fall’. Of course, the axe still has to hit somebody, regardless of whether transfers are cut explicitly or through a fiscal sleight of hand. But in the former case, the connection between the blow of the axe and the wound is immediately visible to everybody, while it the latter case, we have to rely on organisations like the Institute for Fiscal Studies to work out what those announcements mean in practice. Now that the scope for fiscal trickery has narrowed, politicians can no longer promise welfare savings without also saying who they want to make worse off. My guess is therefore that over the next parliament, whoever forms the next government, we will see a combination of politicians beating around the bush (‘Let me be absolutely clear about this’), accusations of secret plans and broken promises, poorly executed savings measures that cause unnecessary hardship, and last but not least, stalled progress on fiscal consolidation.
But there is an alternative. A sensible welfare policy would, where appropriate, start on the demand side rather than the supply side; it would start by asking what drives reliance on a particular transfer, and whether something could be done to reduce that reliance.[1]
The most clear-cut case here is Housing Benefit. Spending on HB currently stands at £24.5bn, and is forecast to rise further, despite all the fiddling with the rate-setting formula.[2] As recently as in the early 1990s, despite a recession and a temporary surge in unemployment, the HB bill was only around £11bn in today’s prices. The increase in HB spending since then has been wholly driven by the increase in housing costs. Cutting HB further while ignoring its driver will hit those who have been priced out of the regular housing market, without really delivering commensurate benefits in terms of cost savings.
Alternatively, we could bring back housing costs (in real terms) to where they stood in the early 1990s, because HB expenditure would then automatically follow, and fall back to somewhere around that level as well. Unrealistic? Absolutely not. The early 1990s were by no means a golden age of housing affordability. By that time, house prices in the UK had already doubled in real terms compared to 1970, the largest increase in any OECD country. But in the early 1990s, the worst was yet to come, so moving back to that level would only mean undoing the worst. Hardly an overambitious goal.
In order to do achieve this, politicians would have to overcome their irrational fear of the anti-development brigade. Politicians seem to believe that the level of Nimby outrage is a function of the level of housebuilding, which leads them to believe that by continuing to suppress development, they can contain the wrath of the Nimby lobby. Politicians should have realised by now that that is not the way it works. Rather, there is a fixed amount of Nimby outrage to go round, which is independent of whether we build 400,000, 40,000 or 4,000 homes per year. Suppressing the housing numbers only increases the ratio of outrage per housing unit.
At the outset of the Great Recession, housebuilding in Britain almost ground to a halt, and is only very slowly recovering now. If I were an anti-development campaigner, I would be playing the old 2 Unlimited song ‘Jump for Joy’ at full volume every day. But that is the opposite of what those campaigners are actually doing. The same people who have always been whining that the countryside was disappearing under concrete are still doing precisely that, and the same newspapers which have always amplified that scaremongering are still doing precisely that as well. The conclusion I would draw is that if the anti-housing brigade is constantly whining anyway, even at a time when we’re not even building anything – why not give them something to whine about, by actually getting the houses built? That would be the way to cut billions – much more than just a measly £12bn – out of the welfare budget, and without making the recipients worse off.
[1] The qualification ‘where appropriate’ has to be added here, because welfare spending also contains a lot of ‘supply-induced demand’. There are transfers which people ‘rely’ on simply because they are there.
[2] HB rates used to be set equal to local median rents, which has been reduced to rents at the 30th percentile of the local rent distribution. They have also been capped in absolute terms, and the £26,000 welfare cap is, in effect, also just another HB cap (since it would be almost impossible to qualify for benefit payments in excess of £26,000 except through HB).
In their first budgets and autumn statements, as well as in the comprehensive spending review, the coalition was able to make a few sizeable savings simply by playing around with the formulas by which transfer rates are set. A change from RPI-uprating to CPI-uprating, a few temporary freezes, a change in some reference value, and Bob was their uncle.
As long they can hide behind formulas, politicians can afford to be relatively open about ‘where the axe should fall’. Of course, the axe still has to hit somebody, regardless of whether transfers are cut explicitly or through a fiscal sleight of hand. But in the former case, the connection between the blow of the axe and the wound is immediately visible to everybody, while it the latter case, we have to rely on organisations like the Institute for Fiscal Studies to work out what those announcements mean in practice. Now that the scope for fiscal trickery has narrowed, politicians can no longer promise welfare savings without also saying who they want to make worse off. My guess is therefore that over the next parliament, whoever forms the next government, we will see a combination of politicians beating around the bush (‘Let me be absolutely clear about this’), accusations of secret plans and broken promises, poorly executed savings measures that cause unnecessary hardship, and last but not least, stalled progress on fiscal consolidation.
But there is an alternative. A sensible welfare policy would, where appropriate, start on the demand side rather than the supply side; it would start by asking what drives reliance on a particular transfer, and whether something could be done to reduce that reliance.[1]
The most clear-cut case here is Housing Benefit. Spending on HB currently stands at £24.5bn, and is forecast to rise further, despite all the fiddling with the rate-setting formula.[2] As recently as in the early 1990s, despite a recession and a temporary surge in unemployment, the HB bill was only around £11bn in today’s prices. The increase in HB spending since then has been wholly driven by the increase in housing costs. Cutting HB further while ignoring its driver will hit those who have been priced out of the regular housing market, without really delivering commensurate benefits in terms of cost savings.
Alternatively, we could bring back housing costs (in real terms) to where they stood in the early 1990s, because HB expenditure would then automatically follow, and fall back to somewhere around that level as well. Unrealistic? Absolutely not. The early 1990s were by no means a golden age of housing affordability. By that time, house prices in the UK had already doubled in real terms compared to 1970, the largest increase in any OECD country. But in the early 1990s, the worst was yet to come, so moving back to that level would only mean undoing the worst. Hardly an overambitious goal.
In order to do achieve this, politicians would have to overcome their irrational fear of the anti-development brigade. Politicians seem to believe that the level of Nimby outrage is a function of the level of housebuilding, which leads them to believe that by continuing to suppress development, they can contain the wrath of the Nimby lobby. Politicians should have realised by now that that is not the way it works. Rather, there is a fixed amount of Nimby outrage to go round, which is independent of whether we build 400,000, 40,000 or 4,000 homes per year. Suppressing the housing numbers only increases the ratio of outrage per housing unit.
At the outset of the Great Recession, housebuilding in Britain almost ground to a halt, and is only very slowly recovering now. If I were an anti-development campaigner, I would be playing the old 2 Unlimited song ‘Jump for Joy’ at full volume every day. But that is the opposite of what those campaigners are actually doing. The same people who have always been whining that the countryside was disappearing under concrete are still doing precisely that, and the same newspapers which have always amplified that scaremongering are still doing precisely that as well. The conclusion I would draw is that if the anti-housing brigade is constantly whining anyway, even at a time when we’re not even building anything – why not give them something to whine about, by actually getting the houses built? That would be the way to cut billions – much more than just a measly £12bn – out of the welfare budget, and without making the recipients worse off.
[1] The qualification ‘where appropriate’ has to be added here, because welfare spending also contains a lot of ‘supply-induced demand’. There are transfers which people ‘rely’ on simply because they are there.
[2] HB rates used to be set equal to local median rents, which has been reduced to rents at the 30th percentile of the local rent distribution. They have also been capped in absolute terms, and the £26,000 welfare cap is, in effect, also just another HB cap (since it would be almost impossible to qualify for benefit payments in excess of £26,000 except through HB).
12 thoughts on “Cutting £12bn from the welfare bill? Easy as pie. Here’s how”
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You’re right to pick
HousingLandlord Benefit as a potential area of significant welfare budget savings. However, your diagnosis of how to achieve truly affordable housing – the homes we have now at the prices we used to pay for them – is lacking. There is no link between house building and house prices or rents: https://a.disquscdn.com/uploads/mediaembed/images/1825/1263/original.jpgThere is a link between house prices and the size of mortgages being granted (both as LTV, and absolutely) and also with the amount of mortgage funding pumping up prices: https://a.disquscdn.com/uploads/mediaembed/images/1810/8174/original.jpg
You could have added a sensible energy policy to your list: energy at sensible prices would allow benefits to be reduced in cash terms at no loss in real terms.
Yes, I’ve also heard that there isn’t a correlation between house prices and house construction. Could you address that please?
I thought your contribution to The Spending Plan was excellent, by far the best section.
Adjust those figures for changes in population size, and you will see a very strong connection. See here, pp. 13-26 http://www.iea.org.uk/sites/default/files/publications/files/Briefing_Smoking%20Out%20Red%20Herings_web%20V03.pdf
Totally agree with article – we have to build a massive amount of social (NOT “Affordable Rent”) housing. Housebuilding costs much the same the length of the land (you should be able to build a 2-bedroom house for under £100k) – but house values drive land values in high value areas. Answer – adopt Matthew Taylor’s proposal in his recent Garden Villages report, and cap land price at 150% current use value. There should be enough brown and greenfield land affordable at 150% CUV to supply the land for the new social homes. Some market housing could be included too (smaller, low-cost market units) for the aspirational first-time buyers and in the interests of mixed, balanced, sustainable communities. Local Authorities use CPO powers to acquire the land at the capped value.
Borrow at low Local Authority rates over thirty years or so and the rents even at social levels will cover the build costs plus there’ll be billions saved from Housing Benefit to fund land purchase at these capped rates. And we the people will once again own a great estate of public housing. It goes without saying that the Right to Buy will have been scrapped.
People who need it get housed but can afford a decent life, paying their own low rents and not being dependent on HB (but if they do need HB it gets paid at a social not market rent level), landowners still get paid half as much again as their land is currently worth, the Housing Benefit bill is slashed, cutting the cost of welfare not just now but for the future (we’d keep on building as needed), Council Tax receipts go up with all those new houses, everyone wins.
Thank you!
Kristian – As you know, I don’t entirely agree with you as I think the major problem isn’t land to build on, it is the fact that regulations force low rise space-inefficient housing. The best way to address the problem is to allow/incentivise much higher rise developments in towns and cities where infrastructure already exists and where housing capacity could be constructed relatively quickly. By this I do not mean ‘high rise’ (as in 1960s public housing disasters) but medium rise high density (3-7 storey) development. Of course, not everyone wants to live in such housing, but it would be appropriate for many and would relieve demand pressure on traditional low rise houses.
Your proposal does not seem clear or logical. If you are suggesting that by returning rent levels to 1990 there will be an immediate saving in HB then that is nonsense. This would require controlled rents that would bankrupt any provider – public or private – as their repayment of debt and cost cover are based on cash flow. However, if you are proposing that HB payable against whatever rents is charged is reduced by 50% then the HB bill would obviously fall. Then either the tenants would have to find the balance or default on their tenancy contract. Given an inability of anyone in work or welfare benefit dependent to raise their income proportionately to fund the deficit between HB and rent level it is probably that default would happen. This would cause require any landlord to obtain possession as reducing the rent they charge by 50% would not be possible. Then the l/l would relet to non welfare dependent tenants or default on L/L loans or sell.
Whilst you can’t give me the intellectual capacity to understand what you obviously think is feasible, perhaps you can explain more simply how your proposal would work.
Hi Kristian, great article. The amount of work you lot provide us with is heroic.
I was wondering, is there any literature on how efficient state welfare vs. private charity is, how much in the £1 does each deliver to the recipient? I suspect the governments legendary legion of bureaucrats takes a fair slice out in the form of overheads compared to the market, but was wondering if there is a simply link you can direct me to to show the comparison in the UK? Or, could be an idea for a piece by IEA.org.uk 🙂
Thank you.
How much would the houses cost to build?
We are currently building a pair of semis locally; timber frame, brick outer skin, around 85sm each; cost £80k per house (built to Code 4). That doesn’t include the cost of the land but does include all build and fees.
dear sir, ways to acjieve welfare cut stricker criteria for benefits paid in extreme cases severe functional impairement and taxing benefits not on size of family limiting total welfare income in familly and waste fraud curtailed amalgation or abolition of several benefits and right to appeal lilmited only on new informations or wrong decision on technical ground peeople have brought bmw car mobility allowance higher rate upper middle class for a child 6 year old with attention defecit syndrome convincing decision maker cannot walk withou holdinhand this iis one bad example of mis use if benefits claimed by those not needed 25 stones man claming mobility and carer and esa he cannoy work and walk does he need benefits or padometer to walk daily to loose weight silly govt encourage to claim and use for wrong reason buy alcohol to drink smoke and keep carer by carer allowance for performing sick and diabled welfare takes away incestive to work and live ascheap money thrown .instead throwning money in benefits provide limited food voucher to hungry and provided need to improvr quality of life so they can work like remploy tax benefits and give tax credit for coming out of benefits
I wondered in for a different reason and noticed this question:
” I was wondering, is there any literature on how efficient state welfare vs. private charity is, how much in the £1 does each deliver to the recipient?”
It depends on the charitable objective of course.
The UK has a State religion – the Church of England with special privileges. There are non-State religions whose charitable status I’m not sure of, but if the objective is to be at one with the one true God, then there is no comparison, as the ratio would be 100v0, 0v0 or 0v100.
Food banks could be looked at:
The Trussell Trust is a less than 5 million a year charitable organisation and helps about 300k different people a year. Multiplied by household size and repeat visitors, it’s just over a million occurrences of help for a person. The data is in their report.
European food banks often get help channelled through EU funding. There’s some data here (http://www.eurofoodbank.eu/poverty-waste/eu-programs). My back of the envelope calculation had the Trussell Trust as being 4-5 times more cost effective.
Most relevant to this thread though would be to compare Housing Associations with charitable status versus Private Landlords, on tenants in receipt of HB, but it would be very hard to control for all the variables. Disabled and behavioural problem families are more likely to be in HA for example. There’s some nice salaries at the Executive and Director levels in Housing Associations though.