Fiddling with Housing Benefit won’t solve the cost explosion

The previous government made the mistake of trying to reduce poverty without paying attention to the supply side factors driving up the basic cost of living. It churned out billions in tax credits and Housing Benefit, while at the same time ignoring the fact that the cost of housing exploded while the cost of food, heating fuel and childcare also rose steeply. This is, to put it mildly, not a cost-effective strategy.

When a room is too cold, it is usually a good idea to check whether the windows are properly closed before turning up the heating – otherwise, one risks choosing a remedy that is expensive and only partially effective. Within this metaphor, Britain under the Labour years was a house in which a lot of windows were wide open like barn doors, and in which the heating system was running at full capacity. As a result, the (metaphorical) fuel bill exploded.

The current government tries to get the bills down to manageable levels again by adjusting the heating here and there, which is fair enough. But it has one unfortunate feature in common with its predecessor: it also ignores the cost inflators on the supply side. This creates problems of its own.

The recent proposal to raise the age of eligibility for Housing Benefit (HB) to 25 years is a good example. This measure will not have the catastrophic effects that the more hysterical critics claim (e.g. ‘Bright but poor graduates will be sent home and everyone will stay where they were born’), but it does suffer from all the inconsistencies that the more thoughtful critics point out.

The underlying driver of the explosion of the HB bill is the explosion of housing costs, driven, in turn, by an absurdly restrictive planning system. There is a wealth of evidence showing that housing costs are, above all, a function of the restrictiveness of the planning system, and if there wasn’t, common sense should be enough to tell us. Since the mid-1980s, Britain’s population has grown by about 4.5m, while average household size has fallen from 2.44 to 2.12. Meanwhile, completion rates of new dwellings have been astonishingly low, both in comparison with previous decades and with other countries. So of course housing costs have exploded, and of course HB expenditure has followed suit.

Yes, some restrictions to HB would still make sense even if housing costs were dirt cheap. If your rent is fully or partially taxpayer-sponsored, you do not have to live in the most expensive pockets of the country. Neither is there a reason why HB recipients should be fully insulated from the price developments which everyone else in the rental market has to cope with. But attempts to address the HB bill explosion while ignoring the supply side of the rental market are bound to fail.

The best way to bring down HB expenditure is to liberalise the planning system, so that more rental units can be built. This would have the additional advantage of creating numerous second-round savings. Moving people off the HB taper slashes their effective marginal tax rates (EMTRs) substantially, improving work incentives. To the degree that people respond to these improved incentives by increasing their working hours, the government would also achieve savings in spending on other means-tested benefits.

Unsystematic fiddling with the eligibility criteria is not the answer to the HB cost explosion. But as long as housing costs are anywhere near their present level, we are bound to get more of it.

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).

6 thoughts on “Fiddling with Housing Benefit won’t solve the cost explosion”

  1. Posted 27/06/2012 at 11:00 | Permalink

    Cameron’s speech on welfare this week is a classic example of majoritarian politics. It was meant to resonate with the majority of the population who consider they pay for welfare but get little back. It is being pushed as a ‘fairness’ issue and has little to do with dealing with the problems of housing in the UK. What compounds the issue is the constituency that this ‘fairness’ argument connects with is also one that would complain about new housebuilding near them.

  2. Posted 27/06/2012 at 15:05 | Permalink

    As well as liberalising planning, the government should abolish HMO licensing, which acts as a deterrent to landlords entering the low-cost multiple-occupancy market. Moreover, it should rescind building regulations that hinder the expansion of capacity in existing properties. Unfortunately, the government is moving in the opposite direction with a host of green building regulations in the pipeline that will greatly increase the cost of new housing.

  3. Posted 27/06/2012 at 15:06 | Permalink

    True, I probably interpreted his speech too much in a literal way. Still, it remains annoying: There are several passages in the speech which refer to housing affordability, and it’s always treated as an exogenous given. The heroes of this talk are those who ‘do the right thing’ but who still cannot afford to move out of their parents’ home. How can you deliver a talk like that without at least alluding to the obvious question: WHY can’t they afford it?

  4. Posted 27/06/2012 at 15:47 | Permalink

    Richard, you are quite right. The problem with housing policy is that interests of already well-housed outweigh those who are poorly housed or who are without access. Housing policy seems to serve only the middle class established home owner, and one wonders what incentive there is for any government to challenge this.

  5. Posted 16/07/2012 at 15:23 | Permalink

    Firstly we could add insulation, close the windows and the doors and insulate. That is the practicle way to keep a home warm, use heating systems that is kind to the environment. Now we move to the housing benefit section.

    Housing benefit, a benefit that is not cost effective because it is available for a short term accomodation. This is because of the shortage in affordable homes. We also talk about the need to supply housing that is affordable to those who work on a basic minimum wage. Not the sort of wage that could pay for a mortgage. This is the trap that quite a few will fall into. Of course, it is known this can also prevent them working, because of the claiming of the housing benefit.

    The Government needs to understand that there are thousands living in not good accomodation in the social housing sector too. New homes are being built but the old remain in place, poorly insulated and poorly heated with out of date heating.

    Planning, is the next issue, of course we need to consider what is to be achieved, too much of one and the system becomes out of balance.

    I feel it is time that someone thought about what they wish to achieve. I think good affordable homes for those who need them, options for part buying for those who could help themselves a little. Not to forget the improvements on some social housing, very much needed.

  6. Posted 16/07/2012 at 15:36 | Permalink

    It should be that the house is insulated, as well as to close the doors and windows.

    Housing benefit has been one of those benefits needed because of the situation and the lack of affordable home to those who can’t afford to buy. These can be working in the less wll paid jobs, below the levels that could afford a mortgage.

    I suggest that the situation could be one where we need more good social housing, not to forget the housing that has already been built and it not up to a good standard, the Government seems to forget about the quality of some of those homes, Poor heating and no insulation. Not a great idea when you think of those living in them could not afford the high costs.

    We need homes as the above comments that are affordable to all, part buy, a good idea for those who can help themselves a little.

    Work should not get into the way of housing, it does with housing benefit.

    Planning has to be an issue, too much and the balance will tip, too little and the situation remains the same.

    I would say time for change, long overdue, let people work and then it becomes less negative for those who feel they struggle to pay for their own homes on a mortgage.

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