Who will be affected by the housing benefit cuts?

Welfare systems need to address two different types of situation faced by working age households. They need to provide short-to-medium term support for living costs in response to labour market fluctuations and frictional unemployment; and longer term support for those who are without a market income for extended periods (in practice many households are located on a continuum between these two poles).

Welfare systems need to address two different types of situation faced by working age households. They need to provide short-to-medium term support for living costs in response to labour market fluctuations and frictional unemployment; and longer term support for those who are without a market income for extended periods (in practice many households are located on a continuum between these two poles).

The function of enabling households to manage fluctuating employment scarcely features in current debate on welfare, despite the major rise in demand-deficient unemployment and under-employment over the last two years and the further rises to be expected as a consequence of cuts to public spending.

The fall in labour demand has played out in the form of increased unemployment, reduced working hours and, importantly, the loss of one set of earnings among many dual-earning couples, and has resulted in major increases in expenditure on both out-of-work and in-work support over the last two years.

None of this is reflected in the coalition government’s rhetoric on welfare, which is carefully calibrated to suggest that long-term economic inactivity, rather than a demand-deficient labour market, is the driver of the expenditure increase.

In fact, aggregate benefits expenditure on the working-age group scarcely changed between 2000/01 and 2007/08, but rose in real terms by 20 per cent between 2007/08 and 2010/11 (Department for Work and Pensions forecast expenditure) – and this does not include the major increases in tax credit expenditure arising from falling incomes and rising unemployment.

The coalition’s cuts to housing benefit (Local Housing Allowance) in the private rented sector, the first of which are scheduled to come in in two tranches in April and October of next year, exemplify the dangers of assuming that all benefit recipients are long term economically inactive and ignoring what is happening in the labour market.

We have summarised the impact of the cuts for most local authorities in this spreadsheet (for a small number of local authorities, this data was not available). Most of the figures are taken directly from DWP’s impact assessment of the cuts, but we have also included data on an aspect not addressed by DWP, the percentage of those affected who are currently in employment (this data was released in an answer to a parliamentary question by Karen Buck MP).

The figures for those in employment are somewhat higher than might be expected for many local authorities, reflecting a steep rise in in-work housing benefit claims since 2008 as households saw their working hours reduced. Indeed, there are currently more in-work housing benefit claims than claims from people on Jobseeker’s Allowance (see below).

These figures concern the impact of all the LHA measures coming in next year taken together. (For more detail on specific measures, see this impact assessment.) Attention has understandably been focused on the effect of capping maximum payments from April 2010, which will make significant sections of the private rented sector inaccessible to households in London receiving LHA.

But the change with the biggest numerical impact in the medium term will be the move in October 2010 from setting maximum entitlements at 50 per cent of the local housing market to 30 per cent, which will lead to losses of on average £39 a month for some 775,000 households nationally (and will actually affect far more households in London than the cap).

The other main change is the abolition of the £15 incentive payment which allowed tenants to keep some of the difference between the maximum local housing allowance they were entitled to and their actual rent. While this policy seems to have been effective in incentivising tenants to look for cheaper properties (some 47% of all LHA tenants are receiving the incentive) its abolition is less controversial than the other measures as it does not threaten to force incomes below the minimum guaranteed by the benefits system.

The proposals to reduce LHA entitlement by 10% for those unemployed for more than a year and to uprate LHA by consumer price inflation are not scheduled for next year and are not included in this analysis, nor are more recent proposals concerning entitlements for single people under 35 and the ‘universal’ cap on households’ benefit entitlements.

While the government has presented these cuts in terms of a dichotomy between taxpayers and claimants, some 26% of all those affected by the cuts are in fact in employment. A further 22% are on Jobseeker’s Allowance, and the great majority of these claimants will be short-term unemployed: only 6% of JSA claims run for more than a year even under current labour market conditions. Thus nearly half of those losing out in the first instance will be people who are either working or have been working until very recently.

Pensioners account for a further 5% of those affected. Those on the so-called ‘inactive benefits’ will thus account for 47% at most of those affected by the changes, and it should not be assumed that all in this group are long term economically inactive: there is considerably more turnover on inactive benefits than the government’s rhetoric implies.

See table 1*:

Claims-affected-by-2011-12-changes-to-Local-Housing-Allowance

It is clear that while households in London will see the most severe losses, the impact will be felt in all regions, with the north west having the highest numbers of households affected after London. There is a north-south pattern in terms of the share of employed households among those affected (the blue line on the chart), with the share highest in the south east and in London.

The chart below summarises the regional picture. It is clear that while households in London will see the most severe losses, the impact will be felt in all regions, with the north west having the highest numbers of households affected after London. There is a north-south pattern in the share of employed households among those affected (the blue line on the chart), with the share highest in the south east (31%) and in London (33%).

In some local authorities the employed share is higher again: in West Oxfordshire, cited by the prime minister in yesterday’s PMQs, some 43% of those affected are in employment, the same proportion as in the London borough of Hackney. At the same time, employed households form a fifth or more of those affected in most regions, showing that in-work LHA is far from being confined to the areas with the highest rents.

See chart 1:

LHA-clients-affected-by-2011-2012-housing-benefit-cuts

Nor is there any reason to expect a fall in the numbers of households in receipt of in-work local housing allowance before the cuts come into effect, unless there is a significant recovery in labour demand. As the chart below shows, in-work housing benefit has shown an almost linear upward trend since the financial markets crash, in contrast to the unemployed (JSA) caseload which has levelled out, although it is likely to rise again with the impact of coming public sector employment cuts. (The data here concerns all HB claims, not just LHA claims.)

See chart 2:

Employed-and-unemployed-JSA-housing-benefit-claims-November-2008-July-2010

Although their impact will be severe for many households, the measures scheduled for next year need to be seen as part of a longer term planned erosion of support for private rents. After 2013 LHA rates will not be revised to reflect local rental market changes but will be uprated only with consumer price inflation. In only a few years, this measure will lead to far more drastic restrictions to the level of rents that will be supported by LHA in many areas than next year’s measures.

It cannot be expected that rents will fall proportionally to the cut to LHA entitlements, as LHA recipients form a small minority of private tenants in most areas. It has been estimated by the Cambridge Centre for Housing and Planning Research that by 2018 only 5% of two-bed flats in inner central Manchester will be within the reduced LHA maximum. The claim that the coalition’s cuts package will leave 30% of properties accessible to LHA recipients applies only to next year’s changes (and only with qualification at that).

The coalition’s intention to drive all LHA claimants to the very bottom of the rental market represents a major change in social protection not just for longer term workless households but for all those who rent accommodation in the private sector and who may need to apply for out-of-work or in-work support at any point. The function of providing support to enable lower income workers to ride out temporary labour market fluctuations will be severely curtailed during a period when this support will be more needed than at any point since the 1990s.

Even a short-term fall in earnings or loss of employment will leave increasing numbers of lower income workers (those without enough in savings to tide them over) with no choice but to take a further drop in disposable income or to try to move to the cheapest available accommodation – considerably cheaper than that which lower income workers not in receipt of benefit currently access.

This point is worth emphasising as the government continues to claim that the changes will simply mean that LHA recipients will be placed in the same position as low income working households not receiving LHA, who have to adjust their accommodation choices to their incomes. In fact, LHA recipients are already in that position.

Recently published research commissioned by DWP under the previous government has shown that there are no significant differences in the average rents paid by LHA households and low income working households: the notion that LHA was allowing large numbers of families to occupy housing which they could not have afforded if they were working is essentially a myth.

The authors stated:

“If the policy objective is to set levels of HB support to the average (median) of rents paid by other similar tenants not on HB with similar characteristics, then the analysis would suggest that to a large extent this is being achieved.”

This result should come as a surprise only to those who are used to thinking of benefit recipients and workers as mutually exclusive groups. The assumption that LHA recipients would routinely trade up to the highest rent properties they could access would imply a quite implausible level of myopia on their part.

We have stressed the impact of these measures on working and short-term unemployed recipients, not because these groups will be the most severely affected – many will be better placed to ride out the changes than pensioners or long term workless households – but because despite their very large numbers they hardly feature in the current debate on welfare cuts.

That is a measure of the success of the coalition’s misdirection strategy of keeping attention focussed on those who can be presented as exemplifying the ‘undeserving poor’ – mainly, long term claimants of ‘inactive’ benefits. These figures should serve to remind all concerned that changes to the welfare system affect all those who may need support at any point in their working lives.

* n.b. The national LHA caseload figures given in the answer to PQ 12676 are higher than those in the impact assessment, which excludes a number of local authorities and which is based on the caseload as of March 2010, as opposed to May 2010 for the PQ.

The estimate of the number of employed LHA claimants in this table is based on the percentage of employed claimants in PQ 12676, applied to the impact assessment caseload, and is therefore lower than in the parliamentary answer. The estimated number and percentage of ‘others not in employment’ are based on the number for ‘others’ in the impact assessment less this estimate of those in employment.

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