Housing Benefit cuts: too little bang for the buck

Kosovo-style social cleansing, expelling the poor, even ‘final solution’ – the debate on Housing Benefit (HB) cuts has been accompanied by a host of gory metaphors, and no doubt some of these will be revived in April when the cuts actually start to bite. I have previously argued on this blog that quite apart from the strong language, the critics hugely overestimate the magnitude of the HB cuts.

I argued that firstly, the quantitative upper limits on HB rates, or Local Housing Allowances (LHA), are set so high that they could only affect a tiny area. Secondly, whether HB rates are set at the median or the 30th percentile of the local rent distribution is not so dramatic a change as it may sound, because local rent distributions tend to be plateau-shaped around the median.

Figures showing what the HB cuts will really mean on the ground are now becoming available. They show that the upper limits only exceed maximum HB rates in 5 out of 192 LHA areas, all of which are in Inner London. For the rest of the country, they are irrelevant. On average, the changes will amount to a cut in the maximum HB rate by £32 per month for a one-bedroom flat, and by £44 per month for a two-bedroom flat. Not every HB recipient receives the maximum rate, of course.

The problem with the HB cuts is not that they are too drastic, but that they are unsystematic. Even after their full implementation, a lot of people will still live in areas where they could not realistically expect to replace HB with earned income. Apart from pushing up the HB bill, this means high local replacement ratios, which keep people away from the labour market.

Ideally, a reform of the HB system would provide financial incentives to relocate to areas where rents are lower, but where realistically attainable jobs are still within reach. Movements from Inner London (where almost one in three households are in receipt of HB) to Outer London or the commuter belt are a prime example. This is the kind of HB reform which would provide a bang for the buck, in the sense of improving social and labour market outcomes while also realising fiscal savings.

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).