Is housing benefit out of control? No, it’s the economy, stupid

A lot of nonsense has been talked about working age benefits. Yesterday, the chancellor argued that working age benefits were “unaffordable”. He and the Work and Pensions Secretary have been explicit that they think the Housing Benefit (HB) chunk of working age benefits is “completely out of control”, citing a huge rise in spending since 2000. So is the Government right about HB?

It’s certainly true that HB spending on people of working age has surged in recent years, from around £10bn per year a decade ago to £17bn today (all in today’s money). But whether it’s ‘out of control’ depends on what has driven that increase and whether that trend is set to continue.

Working age HB is paid to around one million working families on low incomes and about 2.8 million workless people. Unsurprisingly, then, an important determinant of the bill is the state of the labour market and the level of unemployment. But there could be other drivers in there too: perhaps the chronic under-supply of housing is pushing up rent, or maybe there’s just been an inexplicable rise in claims for some other reason. So what is the relative importance of these factors?

The chart below plots working age spending on HB (in 2012-13 prices) against ILO unemployment for each of the years from 2000-01 to 2012-13, over the period of the financial crash and economic stagnation, and the picture is very clear. Fully 94% of the surge in working age HB is explained by the rise in unemployment. In other words, Housing Benefit is not out of control, nor does it seem that any significant part of its recent rise is due to a housing shortage (although the high level of housing benefit – as distinct from the change – may indeed be attributable to the supply problem).

Effectively, the entire rise in Housing Benefit is the result of high unemployment – something that, one hopes, will come down in time. If the government succeeds in getting unemployment back down to the level it was in 2000, then the Housing Benefit bill would also return to the level it was in the halcyon days of 2000 that the Chancellor longs for, and implicitly thinks is sustainable.

Perhaps the chancellor should take a leaf out of his own book and give us a ‘cyclically-adjusted’ figure for HB spending as he (sensibly) does with the public finances. It would show that the entire HB ‘deficit’ is cyclical rather than structural. As for affordability, with underlying expenditure apparently flat in real terms, it seems likely that Housing Benefit spending – even before the government’s cuts to it – would have been a smaller proportion of national income than it was back at the start of the century.

None of this is to say that there is no case to be made for tightening up on some areas of Housing Benefit spending given the wider state of the public finances. Indeed the SMF has argued that the local housing allowance (among other benefits) should be tightened as part of a balanced package of cuts and tax rises to get the deficit down. But arguing for deep cuts to Housing Benefit on the grounds that it is ‘out of control’ is entirely bogus – the government should be straight with people about that.


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