IFS report on Benefit cuts: where might they come from?


Housing benefit

The coalition government made cuts to the generosity of housing benefit totalling about £2 billion per year – though underlying trends (rising private rents relative to earnings and the growth of the private rented sector) meant that real housing benefit spending was still £1 billion higher in 2015–16 than in 2010–11. Given the scale of housing benefit, it is likely to be considered as part of any £12bn package of further cuts. As with the housing benefit cuts made in the previous parliament, further cuts may be accompanied by some additional funding for the protection of particularly vulnerable claimants, which could slightly reduce the net saving.

Cuts to housing benefit unsurprisingly tend to affect low-income families – and hence again to increase income poverty – and particularly those with high rents. They can have behavioural impacts too. There is evidence that the package of cuts to housing benefit in the previous parliament resulted in a small proportion of claimants renting cheaper types of properties; and cuts to housing benefit tend to strengthen work incentives – they mean that families have less housing benefit to lose by increasing their earnings or to gain by reducing their earnings. It is worth noting, though, that cuts to housing benefit may affect substantial numbers of in-work families. The proportion of housing benefit claimants who are in work has been rising quickly, and is now about one fifth (1.1 million).

Most of the coalition’s cuts to housing benefit were in the private rented sector, which actually accounts for only 40% of housing benefit spending. Perhaps the most obvious way to reduce generosity here is to lower the maximum amount of rent that housing benefit will cover (known as the Local Housing Allowance (LHA) rate). The coalition reduced LHA rates from the 50th percentile to the 30th percentile of rents in the local area. Early evidence suggests that this had little effect in pushing down rents, and hence resulted in most claimants paying more net rent, with a small proportion responding by moving house. We estimate that a further reduction in LHA rates to the 20th percentile of local rents would reduce spending by roughly £400 million a year, with 1.5 million low-income private renters having their entitlements reduced by an average of around £300 a year. Because LHA rates are set separately by area and family type, families whose rents are particularly low relative to other families of the same structure living in the same area would not be affected.

An alternative to reducing LHA rates is to make all claimants pay some share of the rent. This would give all tenants some incentive to shop around for cheaper housing. Introducing a ‘co-payment’ of 10% (i.e. reducing housing benefit awards from 100% to 90% of rent up to the LHA rate) for private sector tenants would cut spending by about £0.9bn.

Any attempt to cut housing benefit spending substantially may well involve reforms affecting social tenants, as they account for the majority of such spending. Despite the so-called ‘bedroom tax’, most social housing tenants on housing benefit currently pay no net rent (i.e. their housing benefit covers all rent), subject to a means test. Introducing a new 10% co-payment for all social tenants (and reducing housing benefit by a further 10% for those already affected by the ‘bedroom tax’) would cut spending by about £1.6bn.

Whether in the private or social sectors, co-payments specified as a percentage of rent would mean that those with higher rents – including London renters and larger families – would tend to lose most in cash terms. However, even those with the lowest rents would be affected (unlike with reducing LHA rates, for example).

As discussed above, the Conservatives have already committed to removing housing benefit entirely from 18-21 year-olds on Jobseeker’s Allowance, reducing spending by £0.1bn. One could go further: abolishing housing benefit for all aged under 25 would reduce spending by a further £1.5bn. This would be a big cut for the 300,000 affected claimants, averaging about £5,000 per year. Exempting those with dependent children – perhaps because they can less reasonably be expected to live with their parents – would roughly halve the saving.