Housing Benefit incentives to shop around for accommodation ‘would be fairer’

The need for change was acknowledged by Gordon Brown, the Chancellor of the Exchequer, in last week’s Budget when he announced details of new tax credits for parents, low-income workers and pensioners. But the Government has yet to bring forward proposals for reform.

The JRF report examines alternatives to the existing Housing Benefit rules that are currently leaving the poorest private tenants out of pocket by restricting the amount of rent taken into account when calculating entitlement. It also suggests options for integrating Housing Benefit with the new tax credits that could meet the Government’s desire to simplify the administration of in-work benefits and reinforce its ‘work pays’ message.

Rent reform
The analysis found that seven out of ten private tenants applying for Housing Benefit since new restrictions were introduced six years ago had part of their rent ignored when calculating their entitlement. The average reduction was £19 a week below the rent charged by their landlords; but reductions in London were especially large – as were those applied to young, single people in shared accommodation.

Prof. Peter Kemp, David Rhodes and Prof. Steve Wilcox of the University of York conclude that these and other restrictions have not only added to the overall administrative confusion surrounding Housing Benefit, but also caused unnecessary hardship. They argue that scrapping the restrictions in favour of an incentive to shop around would be more transparent and fairer to private tenants, while continuing to deter them from claiming benefit for unreasonably expensive or overlarge accommodation.

The authors assessed three models of a ‘shopping incentive’ – for example, increasing social security benefits paid to tenants on the basis of average local rents, while paying Housing Benefit as a fixed proportion of the actual rent they pay. They found that a new system could be less confusing and complicated to administer, as well as leaving most tenants better off than the existing arrangements.

Prof. Kemp said: “The models that we tested for shopping incentives would all result in fewer anomalies and bring Britain into line with schemes in other countries with an advanced welfare state. They would cost more than the existing system, but they would also remove the hidden wires that currently trip up private tenants when they discover their Housing Benefit entitlement falls well short of their actual rent.”

Tax credits
The authors highlight the need for Housing Benefit to be integrated with Government Budget plans to introduce a second generation of tax credit schemes in 2003. These include a Child Tax Credit and a Working Tax Credit to replace the existing Working Families Tax Credit (WFTC), and a Pension Credit for older people on low incomes. They argue that although WFTC has reduced the number of families depending on Housing Benefit, there is still a confusing overlap where the Government’s ‘work pays’ message could be undermined.

Reform options include:

• A housing tax credit: operating like the existing childcare tax credit in WFTC, this would be fully integrated within the Child Tax Credit and Working Tax Credit. It would be relatively simple to administer, as well as effective in reducing the maximum amount of benefit that recipients could lose at the margins as their earnings increased. A disadvantage of this proposal would be that more households than at present would find themselves caught in the ‘shallower’ poverty trap created.
• A partial housing tax credit: where a flat-rate contribution towards housing costs would be available as part of the Child Tax Credit and Working Tax Credit. Low-income households with higher costs would be able to apply for Housing Benefit to help with the remainder. This option would reduce, but not eliminate, confusing overlaps between tax credits and Housing Benefit. It would also accord with the introduction of ‘shopping incentives’.
• A housing tax credit, or partial credit, for low-income house buyers as well as tenants: including owner-occupiers in a reformed Housing Benefit or tax credit would end the current tenure divide in housing support for low-income households. The net cost of including low-income buyers in a housing credit scheme has been estimated at £500 million a year. Limits could be placed on the level of eligible mortgage costs by extending a ‘shopping incentive’ scheme so it covered owner-occupiers as well as private tenants.

Professor Wilcox said: “Owner-occupation has expanded to a point where half the poorest households now live in homes of their own. They are more likely to be in low-paid work than low-income tenants, and their ineligibility for Housing Benefit means they can be worse off in work than unemployed, despite the introduction WFTC. This is clearly at odds with the Government’s ‘welfare-to-work’ and ‘making work pay’ policies.”

He added: “Reform of Housing Benefit is long overdue, as Gordon Brown acknowledged in the Budget. It is poorly administered, confusing to claimants and poorly designed in relation to the Government’s social security and housing policy objectives. The Government’s proposals to introduce a second generation of tax credit schemes provides an important opportunity to make the relationship between Housing Benefit and other areas of the tax-benefit system more coherent and credible. Housing Benefit reform is the missing piece of jigsaw if the Government wants to deliver its ‘work pays’ message in areas of high as well as low housing costs.”