Sunday, April 7, 2013

Saving the Welfare State by Dealing with Housing

OK, some thoughts on the government's welfare reforms.

First up, most of it is nasty, reactionary, vindicative and driven by class hatred. But, there is one part of it which, although it will cause a lot of undeserved suffering, may have positive longer term consequences: the changes to housing benefit.

The Tory press like to portray Britain as having a generous welfare state, a 'soft touch' for welfare tourists everywhere. This is ******ks of course. Britain's welfare spending is around the European Union average, and that of course is an average that includes Latvia and Rumania as well as Sweden. Moreover, almost half of the 'welfare bill' of over £200 billion is paid to retirees, which most people would not consider to be 'on welfare'. Of the rest, around £12 billion goes on child benefit, which is independent of income except for higher rate taxpayers, and £29 billion on tax credits for working households (source: IFS). So the actual amount being paid in what most people think of as 'welfare' - cash transfers to working-age people who are not in work - is actually pretty small, as you would imagine given that Jobseekers' Allowance, the main form of unemployment compensation, is a meagre £73 per week.

But there is one big exception to this picture of a miserly welfare state, and that is housing benefit. Britain is actually a big spender on social housing, not only higher than average in Europe, but actually the highest in the OECD, both in terms of the number of recipients and the amounts paid out (source: OECD). The £23 billion housing benefit spend is anomalous amongst advanced democracies - so at least we are generous towards the poor in one respect. Or are we?

In fact the housing benefit spend doesn't benefit the poor all that much. They still tend to live in the worst accommodation, since housing benefit is payable only on properties at the low end of the rental market. The big winners with this spending are landlords, who get to benefit from the higher rents resulting from an injection of demand into the rental market that amounts to more than 1% of GDP. 40-50% of the housing benefit spend goes to private landlords, an estimated 1/3 of whom don't declare their rental income for tax. So this huge chunk of welfare spending turns out to be a big subsidy to middle class rentiers who on the whole contribute nothing to the productive economy.

Not only is this spending wasteful - it is divisive and politically toxic. Middle class left-wing intellectuals, safely ensconsed in their owner-occupied properties in nice neighbourhoods, probably miss the point that benefits recipients are competing, with taxpayers' money, for scarce housing against working people who are paying ever higher shares of their post-tax income for housing. The Guardian can scoff that only five housing benefit claimants received more than £100,000 a year in 2010, but the fact that anyone at all can receive such a sum should alert us that something is badly wrong. 

The problem is that reforming housing benefit inevitably results in suffering. The only way to reform the system is to reduce or withdraw the subsidy, and this will lead to evictions and disruption of family lives. For this reason no government - even Thatcher's - has had the heart to take these steps. But this government looks like it is going to. 

It will be nasty. But Labour needs to take a position on housing. The answer is not to spend public money on subsidizing middle class investments, but to spend that money on providing housing, which is what social spending on housing used to go on before the Thatcherite 'right to buy' reforms of the 1980s. RTB meant a shift in public expenditure on housing from capital investment (building houses) to  current spending (subsidizing rents). This needs to be reversed, and the Tories' cack-handed attempt at reform will create the conditions for fairer reform to happen. What kind of reform? I like this one.