On the face of it, the idea of limiting the maximum amount any family can receive from benefits to £26,000 per year seems eminently fair; this is, after all, the median household income after tax. Iain Duncan Smith, the Secretary of State for Work and Pensions (who, with an estimated private wealth of ‘only’ £1million, is one of the poorest members of the cabinet) has seemingly been everywhere, making the clear and simple argument that it’s unfair that people who are in work should be paying tax to subsidise a higher standard of living for unemployed people than they can afford for themselves. Unfortunately – as with so many clear and simple arguments presented by politicians – the reality turns out to be rather more complicated. So complicated, in fact, that what seems like an eminently fair policy turns up, on further examination, not to be fair at all. Here are some of the reasons why.
First of all, keep in mind that the £26k cap is to apply to income from most benefits. As well as benefits paid to people because they are not working, this will also include benefits that are paid to some people regardless of whether they are in work. The most notable benefits in this category include Child Benefit (which, the government plans, will be available to all families earning up to around £40k – and to some families earning almost twice that) and Child Tax Credits (available, for families with more than one child, for incomes up to £32k – and sometimes even more). The unfairness here is obvious: households that are entirely dependent on benefit will lose their entitlement to money once their household income hits £26k, but households that derive part of their income from other sources will be able to have a household income significantly higher than this and still receive taxpayer subsidy. What this means is that the government are choosing to redirect the limited resources of the state away from people who need the money more and towards people who need it less.
The second thing to note is that this is not a per-person cap, but a cap on the income of households. This means that the policy will impact on some families, but will leave many other households unaffected. This means in turn that all the many advantages claimed for the policy – ending welfare dependency; creating an incentive to work; and so on – will apply to only a tiny minority of the out-of-work population. If the government were serious about pursuing the policy for these reasons – rather than as a crude method for guillotining welfare spending – surely they would be instituting a system of individual caps, with the total for each household being determined by the number of individuals within it? Under such a system they could achieve the same reduction in overall expenditure while also making sure that no child would be unfairly disadvantaged simply because of the size of the family they are born into – a change which would cause much of the parliamentary opposition to the policy to melt away.
Thirdly, note that ‘the cap will be set at £500 a week [£26k per year] for couple and lone parent households’. What this means is that this policy will create an incentive for two-parent families to split since, whenever such a family comes up against the benefits cap, they will be materially better off if one parent moves out, taking some of the children with them. This is because, following such a move, each half of the family will become subject to a separate benefits cap, allowing the same group of people to potentially double their income from benefits. Clearly this has the potential to be counter-productive by increasing the overall cost, but it’s also curiously at odds with Mr Duncan Smith’s loudly asserted belief that government policy should be directed towards the goal of promoting marriage. (Personally, I think people’s living arrangements are no business of the state, and that it should refrain from incentivising any particular lifestyle – singledom, cohabitation, marriage/civil partnership – over any other. This means I find myself in the interesting position of temporarily aligning myself with Iain Duncan Smith when he argues against Iain Duncan Smith’s policies, even though I don’t actually agree with either Iain Duncan Smith or Iain Duncan Smith.)
The final thing that I want to draw attention to is that the cap is to operate at the same level across the entire UK. What this means is that those families that happen to live in high-rent areas will feel the effects of this policy more frequently than families that live in low-rent areas. This is clearly unfair on its own terms, but it also leads on to secondary unfairness. For example, wealthy areas of the country often benefit from better social infrastructure – better schools, lower crime rates, better access to employment opportunities, etc. If out-of-work families are increasingly ghettoised into low-rent areas with poor social infrastructure, this will have the effect of making it harder for children from those families to get a good education, harder for them to find employment, and harder for them to come into contact with positive role models as they grow up. In other words, this policy will have the effect of entrenching poverty, and the kind of attitudes towards work and ‘personal responsibility’ that the government claim they want to eradicate. It will also lead to a society that is ever more starkly divided between the rich and the poor, with all the negative economic and social effects that flow from that.
Perhaps the saddest thing about this is that there is, genuinely, a problem with steadily rising welfare spending, but it’s not the fault of the supposedly feckless poor. The root cause of the problem is that the cost of housing has risen to unsustainable levels. That’s partly the result of the dwindling supply of social housing, and partly the result of a lack of effective rent controls in the private rented sector. So if the government are actually serious about reducing the welfare bill without increasing unfairness – as they claim – then they have two possible solutions in front of them. (They could pursue both simultaneously if they wanted.) The first is to sharply increase the supply of social housing, which would reduce the rental bill (since social housing can be rented at cost price), and would also end the scandal of public money being used to support the profits of private landlords rather than being used to support the public good. The second is to re-establish effective regulation of rents in the private rented sector, which, by limiting the cost of rent, would benefit working households as much as unemployed households.
The government claim that their policy of capping the benefit available to fund the rent of unemployed people will have the effect of reducing private sector rents. The problem with this indirect approach is that it ignores two related problems: firstly, that in many areas there is a shortage of rental accommodation at any price; and secondly that, because a roof over one’s head is not a luxury, people will go to almost any lengths to prevent themselves from becoming homeless. What this means is that tenants – whether unemployed or in work – are forced into competing with each other to see who can afford ever-increasing rents, rather than landlords being forced to compete with each other to offer the lowest rent. (It’s worth noting that, long before the idea of capping benefits was mooted, research showed that as many as 70% of Housing Benefit awards were for less than the full cost of someone’s rent, but this has not resulted in a downward pressure on rents.)
In reality, it’s only by cutting directly to the heart of the problem – the unsustainable cost of housing – that the government can hope to reduce the cost of the benefit bill without increasing unfairness. That this action would also have the advantage of making life fairer for people in employment is a nice additional bonus – a rare example of a win-win scenario.