Nicholas Boys Smith: The Coalition must hold its nerve as it reforms an unfair Housing Benefit system which disincentivises work, traps millions in the welfare system and malignly distorts the housing market

Nicholas Boys Smith is the author of Reforming Welfare and a former advisor on welfare policy. In this piece he argues that Housing Benefit is not just unfair, but a disaster for its recipients, the housing market and the British economy. However, it is good at coping with “polygamous arrangements”...

Now it gets nasty. Removing Child Benefit from the better-off led to a vicious little backlash from the Tory press. But that was mild. Ultimately it is hard to get too successfully indignant about robbing a poor Peter to pay a better-off Paul. Housing Benefit is different. Its recipients are legitimately indigent. Limiting payments has already led to shameful inferences of genocide. There is worse to come. Reforming Welfare was always going to be a dirty war. And the Universal Benefit will create losers in their hundreds of thousands (at least). As some of these implications are analysed and understood, the real fighting will begin.

Iain Duncan Smith’s father was a Battle of Britain pilot. And photos of the young guardsman IDS have something of the G.A. Henty hero about them. He’ll need some pluck. In the years ahead he is going to vie with George Osborne to be the Tory most Left-wingers most love to hate.

Defenders of the status quo have to be vicious. Their argument rests on emotion, not reason. For when you strip away the veneer of managerial and New Labourish gobbledegook they need to be able to present Housing Benefit, Council Tax Benefit, Tax Credits, Jobseekers’ Allowance and the whole complex muddle of the Welfare State as a necessary act of charity. Those who would take it away are therefore not just wrong but evil – on a par, as Polly Toynbee’s outrageous article in The Guardian implied, with Himmler and the gas chambers of Auschwitz.

Meanwhile back in Britain in 2010 the facts are rather different and the case for reforming Housing Benefit rests quite comfortably upon them. And it is about far more than inequity. A few years ago Housing Benefit and Council Tax Benefits were 23 per cent of total non-pension welfare expenditure. They are the largest part of the system. When I wrote a book on the benefits system four years ago I described Housing Benefit as “little discussed, rarely argued over in Parliament, not understood or even known by most members of the public... barely mentioned by the policy experts.” That at least has changed.  Until now nothing else has. For Housing Benefit is an almost uniquely bad benefit: disincentivising work, trapping millions in the welfare system, malignly distorting the housing market and unfair to those who do work in almost equal measure. No other benefit achieves quite this quadruple whammy of awfulness.

To say that Housing Benefit discourages taking jobs, working harder or earning more is rather like saying that being shot in the head discourages wellbeing. Housing Benefit is so discouraging partly because of its brutal withdrawal rates - 65 per cent or 85 per cent with Council Tax Benefit thrown in. Many hundreds of thousands of families therefore keep only 15p of any additional pound they earn - a ferocious disincentive to taking jobs or working harder. However what makes Housing Benefit so uniquely discouraging is the link to the home. Why risk working if you should subsequently lose your job and not get your Housing Benefit back ? Work is therefore perversely inverted from being the guarantor of the family home to its sworn enemy. The state provides. The vagaries of the labour market could take away.

Like the whole welfare system, Housing Benefit is also Kafka-esquely complex – further discouraging work. Due to the benefit’s central and flawed concept (that recipients basically have the right to be housed anywhere including the most expensive neighbourhoods) calculating a “fair” benefit for any one family involves a painful array of allowances, premiums, eligible rents and applicable amounts. Understanding them all is beyond any one person’s comprehension. The official explanation of how to determine a claim is over 8,000 words long with variants for every conceivable arrangement. There are even special schedules for what are described as “polygamous arrangements.”

Nor is there any consistency within the crazy complexity. Wildly different principles apply to different components of the benefit. The number of children in a family does affect the amount of child allowance but does not affect the amount of Family Premium. Why ? No obvious reason. But it makes it impossible for claimants to anticipate the impact of improved circumstances on their level of Housing Benefit. Why risk working if you can’t predict the impact on your, apparently crucial, Housing Benefit ? This complexity is also expensive. Most years at least £400 million is overpaid as a result of error. Yes that is £400 million not a typo - rather more than it costs to manage a squadron or two of Harrier Jump Jets. Incidentally, it is also almost certainly a major underestimate.

Housing Benefit also profoundly and malignly distorts the property market. This is partly because it pushes up prices. And anyone who seriously posits that injecting over £15 billion into the rental sector does not push up rents does not need a course in basic economics but in common sense. A huge scheme to recycle money from the taxpayer to landlords is bad enough. However it gets worse. The supply of housing is also reduced as Housing Benefit recipients tend to stay put (wouldn’t you ?).

So Housing Benefit has two negative supply side effects. It clams up the supply of housing as well as discouraging work. Worse still, the sections of the housing market where prices are pushed up most are those where there is already strong demand – i.e. those areas where there are jobs to do and people wanting to do them. Housing Benefit makes it harder for the right person to find the right job and to live somewhere vaguely nearby.

Finally, of course Housing Benefit is unfair. The Government has (rightly) made much of this. It is clearly unfair to pay a workless family more in Housing Benefit than a working family is able to earn. It is clearly unfair to expect workers to commute for hours while those (in very large part) unable to work are guaranteed houses in expensive neighbourhoods in central London. It is clearly unfair to expect young working adults to share flats to reduce costs while exempting the workless from such a requirement.

So the case against Housing Benefit could hardly be stronger. Most of the public will agree. Reactionary horror will adjust itself to the new reality. In 1996-7 Peter Lilley (rightly) obliged Housing Benefit recipients under 25 to share accommodation just as is now being required of the under 35s. Campaigners and journalists feigned disgust. I should know. It was my job to embolden Tory MPs and brief journalists. It was the most enjoyable brief ever. I had a simple formula: “I am under 25, working full time and can’t afford my own self contained flat. Why should taxpayers buy me a better standard of living, unemployed, than I can currently afford employed ?”

It was quite hard to argue with once you got into the facts. But there was still a media stink. Now, more than a decade on, no one has ever proposed going back – to do so would be absurd. A few years on, the same will be true of the changes being made now. Dire predictions of holocaust and disaster are as wrong-headed as they are tacky and unpleasant. There will be some rough justice and hard cases but a few tens or even hundreds of millions of hardship payments can sooth the very worst of these for the necessary few years.

For the facts are clear. Housing Benefit is not just unfair to those who do work. It is expensive. It disincentivises work. It traps millions in the welfare system. And it malignly distorts the housing market. The Coalition must hold its nerve.