Discussion on the reform of benefits and taxation frequently avoids the issue of housing benefit. This should not surprise us, as there can be no more complex benefit. It is the only part of the benefits system which has ever seized up completely (in the mid-’80s, when an attempt at reform resulted in Housing Benefit Supplement, the collapse of the system, and the reform’s abandonment); it is the only part of the system which has to cope with variables unrelated to personal circumstances (because housing costs vary so widely across the country); and it is the only part of the system currently suffering under four distinct transitional arrangements.
It is therefore to the credit of the Pivot Initiative that it has issued a well-argued report on the reform of housing benefit (see the news item below). The reforms proposed would be genuine simplifications of the system, and the cost to the exchequer of these reforms would be modest. The suggestion that both housing benefit and council tax benefit should not be withdrawn at the same time would be particular helpful as it would increase the rate at which net income rises as earned income rises and would therefore improve incentives to seek employment and to increase earnings once in employment.
Of longer term interest is the more radical proposal for housing allowances, comprising a flat-rate element and an element calculated as a proportion of actual rent paid. This reform would turn housing benefit recipients into participants in a market, leading to greater efficiency in the allocation of housing.
But the radical question which is not asked is this: If it is beneficial to reduce the effects of means-testing, then why not seek to abandon means-testing altogether ? The contribution to the debate later in this edition suggests precisely this.
The launch of the Pivot Initiative’s report Hope for Housing Benefit: a strategy for housing benefit reform.
The Pivot Initiative was established a year ago at Centrepoint, the national youth homelessness and social exclusion charity, by Peter Dawe, entrepreneur and founder of Unipalm-Pipex, the internet company, to research means of reducing the marginal tax rates experienced by people on low incomes. Its major interest has been the reform of housing benefit, and to this end its Director, Daniel Brewer, has edited a report, Hope for Housing Benefit, which was launched on Wednesday 7th November at the Institute for Public Policy Research.
At the event Sue Regan (IPPR) welcomed a diverse group of MPs, civil servants, journalists and representatives of voluntary organisations. Lord Adebowale (former Chief Executive Officer of Centrepoint and now Chief Executive Officer of Turning Point) spoke about the difficulties which the housing benefit system poses for young people, and the difficulties involved in understanding and reforming the system. Daniel Brewer introduced the report, which suggests a number of reforms which would simplify the housing benefit system and at the same time reduce the poverty trap which the system currently imposes on low earners.
Currently 4.6m people receive housing benefit, so there are 4.6m people who experience rapid withdrawal of the benefit as their earned income rises, and a lot of people who suffer a disincentive to seek employment or to increase their earnings once in employment. If employment is to be a major means of lifting people out of poverty, then housing benefit is a problem.
The report makes several proposals:
Extended payment periods: Housing benefit currently runs on into new employment for four weeks, but there are conditions attached to the run-on. To remove the conditions would ease the transition into employment;
Nondependent deductions: Other adults living in someone’s home are currently means-tested (a means-test within a means-test), and if information on their earnings is not available then the maximum nondependent deduction is applied to housing benefit claims. The report proposes a small flat-rate deduction for earning nondependents and no deduction at all for nonearning nondependents. This would reduce the risk of nondependent young adults being asked to leave home;
Longer payment periods: At the moment, any change in circumstances triggers a reassessment of housing benefit. Working Families Tax Credit is based on a 12-month payment period during which minor changes are ignored. The report suggests that for housing benefit a 6-month payment period during which minor changes would be ignored would simplify administration;
Combining Council Tax Benefit and Housing Benefit tapers: At the moment, as other income rises, both council tax benefit and housing benefit are withdrawn together, contributing to a total withdrawal rate of 85%. This is a disincentive to seeking employment. The report proposes that council tax benefit should be paid at the full rate until housing benefit has been completely withdrawn, and that only then should council tax benefit begin to be withdrawn. This would result in a withdrawal rate of 65% throughout, giving many families a net weekly income £20 higher than at present;
The elimination of earnings disregards: The disregards are extremely small and thus provide no real incentive to seek employment. They should either be increased or withdrawn. The report suggests that the taper be reduced by 10% at the same time as the disregards are removed, thus increasing incentives over a broad income range and reducing them only for those earning very little.
Housing allowances: At the moment, housing benefit is related directly to actual rent paid, but in each area the rent levels on which calculations are based are restricted. Many people cannot find accommodation at the maximum rent level allowed, so they have to find some of the rent themselves. The report recommends that in the longer term housing benefit should be replaced by housing allowances made up of a flat rate element (related in each area to average rent levels) and an element proportional to the actual rent paid. This would protect people who could only find expensive accommodation, at the same time as giving people an incentive to seek cheaper accommodation should it become available.
The report contains graphs showing the effects of some of the listed changes on net incomes, and a table showing how the implementation of the different proposals might be related to a timetable.
Debate following the presentation ranged widely over the provision of housing, differences in costs throughout the country, the difficulties faced by pensioners who would lose from the proposals (such as owner-occupiers on council tax benefit but not on housing benefit), the relationship between high housing costs and low take-up of working families tax credits, and applying a housing allowance system to home-owners as well as tenants.
Anthony Lawton, the new Chief Executive Officer of Centrepoint, declined to sum up the discussion, instead reflecting on the difficulty of the subject and the importance of tackling the problem.
The report is obtainable from The Pivot Initiative, Centrepoint, Neil House, 7 Whitechapel Road, London E1 1DU, telephone +44 (0)20 7426 5397, fax +44 (0)20 7426 5448, email: email@example.com, website: www.pivot.org.uk.
The inaugural conference for the Centre for Microdata Methods and Practice (‘cemmap’)
On Thursday 6th December, the new Centre for Microdata Methods and Practice, a joint venture between the Institute for Fiscal Studies and the Department of Economics at University College London, was launched with a conference entitled ‘Microdata Methods and Practice: Perspectives and Priorities’. Speakers included Professor Andrew Chesher, Director of the new center; Andrew Dilnot, Director of the IFS; Baroness Sarah Hogg (Chairman, Frontier Economics, and previously head of the Downing Street Policy Unit from 1990 to 1995); Evan Davis, Economics Editor, BBC; Professor Richard Blundell, of the IFS and UCL; and Sir Andrew Turnbull, Permanent Secretary to the Treasury.
Sir Andrew’s presentation was particularly relevant to discussion of the reform of tax and benefits. He outlined the Treasury’s policy of basing reform on evidence, and introduced 1.the Treasury’s ‘Evidence for policy choice’ website, 2. its evidence based policy fund, and 3. the evidence based policy cycle, which implies the following process: data ? analysis/review ? research ? policy thinking ? consultation/testing ? enactment ? set-up evaluation ? delivery ? outcome ? data.
Given the resources, the Citizen’s Income Trust could clearly make a substantial contribution to all stages of this cycle up to the ‘consultation/testing’ stage
The Zacchaeus 2000 Trust comments on how the government’s New Deal scheme is working:
The Zacchaeus 2000 Trust has recently funded work at the Family Budget Unit to determine how much people need to live on, and has publicised the results of the research. It has also made submissions to government on a variety of government initiatives on the basis of its own research, and a recent submission on how the government’s New Deal for young people is working might be of interest to readers of this newsletter:
The Trust writes:
“We suggest the committee investigates the following areas of concern during its new enquiry.
A poverty trap is created by Working Families Tax Credits. The tapers cut out the council tax and housing benefits too soon. The transfer of the full payment of rent and council tax to the low paid employee can result in greater poverty in employment than out of it. So debts arise.
People who experience short periods of employment on low incomes and then return to unemployment on benefits can find themselves in debt because their pay was too low while they were employed to feed themselves and their children and, at the same time, pay the Council Tax and Rent. Low paid contract workers are particularly vulnerable.
A further problem for the low paid is the Local Authorities method of calculating “eligible rent” which can be less than the actual rent. Housing benefit is paid to cover the eligible rent leaving the tenant to pay the balance of the actual rent out of the already inadequate statutory minimum incomes either in or out of work.
Another trap is the debt caused by the delay and inefficiency in processing benefit applications in local authorities, benefit agencies and job centres, or their privatised equivalents. Getting off benefits and getting back on puts people in debt and on the streets because of delays and mistakes. This is caused by shortage of staff and lack of training.
Claimants fall into debt when going into employment because the payment of benefits is not cancelled and they are then charged by the local authority for the over payment, and when going back on to benefits into unemployment because delays and mistakes mean that the rent is not paid. This leads to threats of eviction and homelessness. The same is true of council tax leading to threats of distress and prison.
The benefit system collapses altogether when a young person falls out with the “New deal for young people” and income support is cancelled. This forces them into the informal economy or homelessness when their skills do not match the jobs on offer in the formal economy. Seven million adults can barely read or write. Carrying drugs from A to B pays £50 a time. This cancellation of benefits should be repealed.
We hope the committee will investigate whether this cancellation of benefit contravenes the International Convention on Economic, Social and Cultural Rights.
The number of unemployed is counted by the number receiving benefits. There is, therefore, political pressure to get people off benefits. This pressure may be influencing the decisions of staff in a manner which deprives people of benefits to which they are fully entitled.
I hope the committee will investigate the destinations of the 29% of young people leaving the New Deal to unknown destinations.”
The Centre for Asset-based Welfare
The Institute for Public Policy Research has launched a ‘Centre for Asset-based Welfare’ to study the role of assets (such as savings and investments) in welfare policy. Asset-based policies could become a significant part of the welfare state. Already the government has proposed a Child Trust Fund, and the new Centre plans to undertake research which will give a better understanding of why holding assets might create beneficial social and economic outcomes for individuals.
In an article in Prospect (December 2001, page 50), Gavin Kelly (Research Director of the IPPR) and Julian Le Grand (Professor of Social Policy at the London School of Economics) discuss the way in which asset accumulation is currently subsidised for the already wealthy (in the form of tax relief on pension contributions) and the way in which the asset-based welfare suggested by Thomas Paine has historically been submerged beneath a welfare system based on the reallocation of income rather than of capital. The authors tackle the ‘futility’ objection to such plans as the Child Trust Fund (the argument that small amounts are pointless) by suggesting that once an idea is established then public opinion can determine the level of the payments, and by drawing on research which shows that even small savings can increase people’s wellbeing.
In addition to the Child Trust Fund, the government is also planning a ‘savings gateway’, whereby every £1 saved by an individual (up to an annual limit) will be matched by £1 from the government.
The Citizen’s Income Trust will watch these new government initiatives with interest, and will study carefully any research which the new centre publishes. The universal nature of the Child Trust Fund and the savings gateway, and the simplicity of their administration, will make their behaviour similar to that of a Citizen’s Income, and how these initiatives are received will be useful information for anyone interested in the extension of universal benefits. And because universal benefits make people more likely to save (because means-tested benefits are a disincentive to saving), we hope at some point to see the government suggesting a small Citizen’s Income to match these current experiments in universal provision.
(The Institute for Public Policy Research is at 30 – 32 Southampton Street, London WC2E 7RA, tel. +44 (0)20 7470 6100, fax +44 (0)20 7470 6111, email: firstname.lastname@example.org; website: www.ippr.org. A useful introduction to the topic is Assets and Progressive Welfare, edited by Sue Regan, price £7.50, ISBN 1 86030 160 6, published by IPPR in March 2001. The Assets Effect by John Bynner and Will Paxton investigates the link between assets and well-being, price £7.50, ISBN 1 86030 161 4, published by IPPR in October 2001).
The Ninth Congress of the Basic Income European Network
Income Security as a Right
and it will be held at the International Labour Office in Geneva from the 12th to the 14th September 2002.
Further details can be obtained at www.basicincome.org or by contacting the Citizen’s Income Trust; and we shall publish further details in our next newsletter.
The reform of Housing Benefit
Housing Benefit is an essential component of many people’s income, enabling them to afford somewhere to live; but it is also a major contributor to the poverty trap. Housing Benefit is means-tested, with a 65% withdrawal rate as earned income rises, meaning that someone who leaves means-tested benefits for paid employment, or who increases their earned income, can suffer high marginal tax rates. There is a small disregard, meaning that it is worth someone being employed for a couple of hours a week, but not for longer. And because short-term employment means the loss of Housing Benefit, a new application, and then another application when the job ends, short-term employment is avoided because claimants cannot predict the effect on their Housing Benefit and they fear administrative mistakes and the consequent rent arrears.
Ideally, housing costs should be low enough to enable Housing Benefit to be dispensed with, and the government’s recent Green Paper on housing and the subsequent statement of policy regard the reform of social housing and the implementation of additional means of providing affordable housing as important ways of enabling people to afford decent housing. But the government recognises that this will be a long-term strategy, and therefore makes proposals for the reform of Housing Benefit in the short term, the key methods being to raise standards in administration, to simplify the four existing transitional protection schemes (left over from previous attempts at reform), and to ‘promote work incentives’. The policy statement records that amongst those who commented on the Green Paper “there was widespread support for taking action to improve work incentives ……. [and] there was general support for longer-term, more structural reform, but varying views about when it should take place, and in what form.”
The policy statement recognises that “much of the work disincentive effect lies in the administrative problems, rather than the design of the scheme itself,” and that “Housing Benefit is complicated. This makes it difficult for local authorities to administer and difficult for the public to understand. That, in turn, make it more vulnerable to fraud and error and damages work incentives.” This leads the government to the conclusion that what is required is “a more effective process for making claims, along with changes to ease the transition into work and improve the administrative fit between Housing Benefit and tax credits.” The document proposes the removal of the need to make a new claim on starting work, and the speeding up of Housing Benefit payment if a job ends after a short period. The Department has decided not to reform disregards, tapers and non-dependent deductions at this stage because, “given the current problems, sorting out the administration, combined with our ‘benefit run-ons’, will have more impact on work incentives than changing additional rules in these areas.”
A proposal in the Green Paper, and one which has been greeted with interest by respondents (including the charity Shelter), is the idea of a flat-rate element. A Housing Benefit made up of a percentage of a locally-agreed flat rate (based on average local housing costs) and a percentage of a claimant’s actual housing costs would offer some incentive to claimants to seek cheaper accommodation if they were able to do so. Clearly, a scheme with a flat-rate element would encourage people to move to cheaper accommodation if they could, as doing this would increase their disposable income. A less steep taper, increased disregards, and longer claim periods, would enhance work incentives. The Way Forward for Housing mentions each of these possible reforms, but does not combine them. If all four approaches were to be taken together, then the poverty trap effect of Housing Benefit would be much reduced, as people would have a greater ability to increase their disposable income through moving home and/or seeking employment or increased earned income.
The logic of this argument leads to the conclusion that to set Housing Benefit at a locally-agreed flat rate, to remove the taper completely, to increase the disregard to the total of someone’s earned income, and to increase to a lifetime the period for which the benefit is paid, would remove completely all disincentive effects currently related to Housing Benefit. Given that everyone needs to be housed, to pay such a benefit to every individual (with children’s benefits being paid to adults caring for them) would avoid the current necessity to work out who is living in which household. And the fact that this benefit would be going to individuals who are not currently in receipt of Housing Benefit is no argument against this approach, as all that is required to recoup the money is to lower tax allowances and raise tax rates slightly.
Such a simplified system would leave little room for fraud or error (both identified as serious problems in the Green Paper), and it would give people greater confidence to go out looking for work, as they would know that their benefit would not be affected.
A major problem in London is that low-paid essential workers can no longer afford to rent or purchase accommodation. To pay a Housing Benefit as outlined above would mean that, whatever someone’s earned income, they would receive a higher benefit in areas of high housing costs and a lower benefit in areas of lower housing costs. Thus a simplification of Housing Benefit along these lines, which would extend the benefit in a non-withdrawable fashion to low-earners, would contribute towards the solution of an additional and serious problem.
Radical proposals are rarely implemented in the benefits field (Family Allowances, which became Child Benefit, are an important exception), but if the logic of an argument leads to desirable outcomes, then there is surely an obligation at least to consider the possibility of a radical solution, particularly where that solution might tackle problems in addition to the ones which it was originally designed to tackle.
Shelter suggests the following criteria by which any housing scheme should be judged: Housing Benefit should
· Promote social inclusion
· Be paid to people who cannot pay for their own accommodation
· Cover reasonable rents
· Make work pay
· Be transparent and accountable.
The scheme proposed in this paper fulfils every one of these criteria.
I would like to thank Daniel Brewer of the Pivot Initiative, Tarig Hilal of Crisis, and Matthew Waters of Shelter, for their assistance. The views expressed in this contribution to the debate are those of the author and are not to be taken to be those of the individuals or organisations above or of the Citizen’s Income Trust
The Citizen’s Income Trust and its future
Following the ending of the Joseph Rowntree Charitable Trust’s generous funding a year ago, the Citizen’s Income Trust has successfully negotiated the change from being a well-funded organisation with an office and paid staff to being a low-budget organisation run by voluntary labour. The organisation’s activities have been refocused on our primary objective: the promotion of debate about the feasibility and effects of Citizen’s Income schemes. The newsletter has been issued more regularly than before, the website has been maintained, and after running in this fashion for the next couple of years we hope to be in a good position to seek funding for the longer-term projects which we are planning.
The one problem which the trustees face is that the Trust ended 2001 with no money in the bank. We do not currently have to pay for an office or for paid staff, but website and email hosting, insurance, audit fee, telephones, stationery and postage cost about £1,500 p.a., and the newsletter costs about £3,000 p.a.. Subscription income from institutions amounts to only about £1,500. The Trust therefore requires donations of about £3,000 p.a. to perform the basic functions for which it exists.
A serious problem is that the promotion of debate on the reform of tax and benefits does not now fit the grant-making criteria of any charitable trusts. Whilst we hope that in the future particular projects might attract such funding, it is difficult to see how any grant-awarding trusts might be persuaded to fund the Trust’s core running costs. We are therefore entirely dependent upon individual donations.
The next five years
In order to plan for the next five years and to be able to seek funding for projects such as seminar series, conferences, new publications, research projects (particularly on costings) and a commission on the reform of tax and benefits, the trustees need to be sure that donation income of £3,000 p.a. will be available for the next five years.
Can you help ?
Many of this newsletter’s readers have already been generous with donations for the current year. Whether or not you have already made donations to the Trust, would you be willing to promise a fixed annual or monthly sum for a period of five years ? And if you know of any individual, company, or other organisation interested in the reform of tax and benefits, would you be willing to show them this appeal and ask for their help ?
The trustees of the Citizen’s Income Trust have decided, reluctantly, that if by the middle of June the Trust has not received promises of £3,000 p.a. then the charity will not be viable in the medium term and that closure will be inevitable. We wish to avoid this if at all possible. The Citizen’s Income Trust is the only charitable trust with the sole aim of promoting debate on the reform of tax and benefits – which is why we are asking for your help.
If you might be able to help the Trust and would like to discuss making a regular donation, whether large or small, annually or monthly, to the Trust, then please get in touch with the Director, Dr. Malcolm Torry. Contact details are on the front of the newsletter. He would also like to hear from you if you would like to pay for one of the short-term or long-term projects we are planning, such as a new introductory leaflet (£1,500), a seminar series (£3,000), an annual lecture (£1,000), research on the costings of alternatives (£5,000+) and a commission on the reform of tax and benefits (£160,000).
With many thanks for your continuing interest in a debate essential to the health of our society and economy,
Anne Miller, Chair of the trustees
Philip Vince, Secretary and treasurer