Benefit cap is failing to tackle the cause of high benefits

New statistics on the impact of the benefit cap show some success in getting people into work – but a strategy to tackle the drivers of benefit spending would bring more significant savings, says Katie Schmuecker.

Since April 2013, the benefit cap has meant out-of-work families with children cannot claim more than £26,000 in benefits (although those on certain disability benefits are exempt). The latest statistics on the cap were published yesterday by the Department for Work and Pensions (DWP). They show that 63,000 families have had their benefits capped to date, and the people most likely to be affected remain those with a large number of children and those with high housing costs (and frequently both).

The rationale behind the cap is usually presented as a means of incentivising people to start work and move if their housing costs are too high. Of the households capped to date, nearly a quarter (16,000) have since started a Working Tax Credit claim – indicating they have moved into work – which is good news. While the statistics indicate some success, the DWP’s own evaluation of the impact of the benefit cap demonstrates that caution should be exercised before attributing large increases in employment to the cap. The policy was introduced in a context of a recovering jobs market with falling unemployment and rising employment. This means those who would have moved into work anyway need to be distinguished from those who moved into work because of the benefit cap, something the DWP’s careful analysis sought to do.

It found 19 per cent of capped households moved into work in the 12 months from May 2013, compared to 11 per cent for a similar uncapped group – a difference of 8 percentage points, although the difference falls to 5 percentage points once differences in people’s characteristics (like the age of their children and where they live) are taken into account. This equates to an additional 2,000 families moving into work as a result of the cap during this period. The same research also concluded that the cap had not led to a significant increase in the number of families moving house overall, although it may have increased the probability that those with very high rents – disproportionately in London – would move.

So the early days of the benefits cap policy could perhaps be summed up as few people moved house and a modest number were encouraged to move into work. In the main, families did neither of those things and instead found a way of coping with less income. The Institute for Fiscal Studies estimates half of the households subject to the cap are worse off by at least £46 a week, and in some cases far more.

The Summer Budget announced a lowering of the cap from April next year, bringing it down to £23,000 in London and £20,000 outside of London. This will increase substantially the number of families that will see their benefits capped. Indeed, analysis by the National Housing Federation indicates the effects will be felt acutely in the social rented as well as the (generally more expensive) private rented sector. They find couples with three children will hit the cap across the UK, finding themselves around £40 a week short of the money they would need to cover the rent on a three-bedroom housing association house in the North and Midlands (and around £50 short of a four-bedroom house).

This gets to the heart of the problem with the benefit cap: it tackles a symptom – that some out-of-work people have high benefit claims – rather than the cause, which is the fact that housing is expensive in many parts of the UK. This government’s housing policy so far has emphasised wider home ownership, with ambitions to increase the number of ‘starter homes’ and plans to extend the right to buy. What is missing is a complementary strategy to increase the supply of genuinely affordable social housing, so that families don’t have to end up in the more expensive (and less secure) private rented sector. Between 2010 and 2015, the generosity of Housing Benefit was reduced by £2 billion, yet the overall Housing Benefit bill still increased by £1billion as a result of rents rising faster than earnings and more people living in the private rented sector claiming Housing Benefit.

The Treasury estimates the new lower benefit cap will save £100m in 2016/17 and £310m in 2017/18. The benefit bill this year is £220 billion (including pensions). Incentivising work is right but what would deliver more significant savings is a strategy to tackle the drivers of benefit spending in the UK. This means helping more people to get on at work by working with businesses to boost productivity to increase pay, security and progression in work. But a core element of the strategy must also be to respond to the UK’s housing problems by building more genuinely affordable homes.

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