Housing Benefit: Osborne’s approach does not address the dynamics of cost explosion
Some of the old video recorders made in the 1980s had an annoying kink: they could not hold the freeze frame mode for long. Shortly after pressing the pause button, they would automatically switch into play mode again.
This is also a common property of caps and freezes on public expenditure programmes. George Osborne’s Emergency Budget speech showed that the coalition is set to press quite a few pause buttons. Fair enough. But this will not prevent the play mode from kicking in again in a couple of years, because the underlying dynamics of cost increases are left in place.
The treatment of Housing Benefit (HB) epitomises the above. Through measures like quantitative upper limits on the reimbursement of housing costs, a decline of HB spending by £1.8bn over the next five years is envisaged. This is an achievement, after a long upward trajectory. Osborne’s honesty was also encouraging: “Costs are completely out of control. We now spend more on Housing Benefit than we do on the police and on universities combined.”
But costs spiralled out of control for a reason. HB works, in practice, much like a cost reimbursement scheme. The amount which can be claimed is equal to the median rent for a specified property type in a specified area, the so-called ‘Broad Rental Market Area’ (BRMA). But since there are so many BRMAs – England alone is divided into 153 of them – a claimant’s actual rent will usually come quite close to their reimbursable rent.
This means that there is little incentive for HB recipients to economise on housing. Moving from an average-priced 1-bedroom-flat in Inner North London to one in Outer Northeast London would cut rental costs by almost £5,000 per year. But it would cut entitlement to HB by exactly the same amount.
This leads to the absurd situation that 30% of all households living in Inner London receive HB. The national record is held by the borough of Hackney, with a share of 44%.
The number of BRMAs should be cut down to a dozen or so, and HB should be paid out as a fixed lump sum based on household size. HB could be gradually reduced, as recipients would gradually move to cheaper areas. Far from “penalising” the poor, this would mean treating HB recipients like adults, who make a trade-off between housing and other goods like everyone else.