Getting tough on the causes of welfare

Recent welfare reforms have led to hardship but have not achieved significant long-term savings. In this essay, Claudia Wood sets out what a policy that tackles the structural causes of welfare spending might look like.

The Government’s welfare reform agenda has been one of the most controversial and contested of this parliament. It has been buffeted by legal challenges, claiming the cuts to benefits are contravening human rights; had to withstand more than a dozen queries by the UK Statistics Authority over questionable use of benefits data; and faced exposés concerning hundreds of millions wasted in IT on the Universal Credit ‘vanity project’.

The staunch refusal of Iain Duncan Smith, Secretary of State for Work and Pensions, to be moved from his job in the last reshuffle and his determination to end what he sees as the UK’s benefits dependency has led to some describing him as a religious fanatic, blind to evidence or facts which do not support his case.

At the beginning of July, Glenda Jackson of all people became a viral hit when the Parliament channel captured her savaging Duncan Smith in an Opposition Day debate on DWP performance. Over 200,000 people have watched her on YouTube declaring: ‘Perhaps he is floating so high in his self-appointed sanctity that he has forgotten what is actually happening out there in this country as a direct result of his incompetence and failure to accept his responsibilities.’

Criticism isn’t just coming from the usual suspects. A particularly scathing article in the Spectator, entitled ‘The Conservative Case Against IDS’, accused him of wasting public money, a relentless pursuit of the grand vision while missing the important detail, and shamelessly misusing stats to justify his agenda.

It’s clear that for many, recent welfare reform has become a personal and deeply emotive issue focusing on the Secretary of State and the private companies, such as Atos, administering the new regime. But then how can it not when people’s lives quite literally are at stake – who can forget the poignant images of the single flowers being laid in tribute of the disabled people who have died after Atos found them fit for work?

But let’s put that to one side for one moment and take a cold blooded look at what’s been achieved and how. At its most basic, the welfare reform challenge we face as a country is one of supply and demand. The UK population, driven by demographic change and economic forces, demand more support from the state, and the welfare state responds by supplying financial aid.

In order to drive down the benefits bill, this government quite clearly focuses on cutting off supply – tightening eligibility for what can be claimed, and applying more conditions. Activities to help reduce demand (apart from a more buoyant economy) have, by comparison, been half-hearted at best – efforts to help people into work include the Work Programme’s hit and miss performance, particularly for those hardest to help, and the decline of JobCentre Plus’s role as supporter, in favour of its role as sanction administrator.

It’s clear, however, that the only way to achieve a substantial and sustained reduction in welfare spending is by tackling the causes of this spend, not just the symptoms. This essay considers what a welfare reform agenda might prioritise if it were focused on tackling the drivers of demand for benefits.

FIRST PRIORITY – TACKLING HIGH RENTS

Housing Benefit represents the single largest proportion of welfare spending – 14 per cent of the total annual spend this year, costing £24bn and predicted to hit £25bn by 2017. Despite a modest £425m drop last year, due to the range of supply-side reforms to housing benefit the government has put in place to reduce spending, this has failed to stop the inexorable rise in housing benefit costs over the past 20 years which has seen spending increase from £6bn a year in 1991/2.

This is due to an increase in the number of people eligible for housing benefits – predicted to increase by a further 148,000 to 5.1 million people by 2018-19 – and the increases in the amounts of housing benefit being claimed. But both are directly linked to rental prices, which have spiralled uncontrollably since the 1990s. Rents in the private rented sector rose by 70 per cent between 1997–98 and 2007–08, compared to CPI inflation of 20 per cent, and are predicted to increase by a further 35 per cent over the next six years.

Unsurprisingly, 1.3 million low to middle income families now spend in excess of 35 per cent of their household income on rent and the number of people in work entitled to housing benefit has increased by 86 per cent in the last three years. 1.2 million working people will be claiming housing benefit by next year.

This trend, in turn, is driven by the chronic shortage in housing – we have experienced several successive years of under-building, and only 109,370 new homes were completed last year – half of the 220,000 new homes we need to build each year just to keep up with demand.

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This shortage means both purchase and rental prices have increased year on year, and in many parts of the country, beyond the reach of an average earner.

To exacerbate the situation, central funding for building social housing was scrapped in 2010, so that this finite amount of housing stock with affordable rents is in high demand – there are around 5 million people on waiting lists for these homes. The result is that private landlords can charge very high rents to the 1 million private tenant families in the UK.

Until recently, this was met by the Government through housing benefit, matching the average rents in these inflated local rental markets. However, in a bid to stem the tide of the ever-increasing housing benefit bill, the Coalition Government employed a straight demand-side tactic – tightening eligibility for housing benefit and capping the amount available to claim.

For social rented properties, this has meant the controversial spare room subsidy will see 471,000 people with a room designated as ‘spare’ losing on average £14.40 per week in housing benefit. The theory? Pay up or move to somewhere smaller and free up space. The reality is that the policy, while just over a year old, has seen just 4.5 per cent of those affected downsize, the low movement rate ironically due to the widespread shortage of smaller properties to move to. Some, in desperation, have moved into private rented accommodation, perversely increasing the amount of their housing benefit claim due to the private sector’s higher rental rates.

The private renting population, whose housing benefit had always been contingent on the number of bedrooms they needed, have been even more tightly squeezed: the amount of housing benefit available to claim became linked to the bottom 30 per cent of market prices in each local area rather than the median, and subject to a capped amount per bedroom regardless of whether local prices are higher. A further cap of £500 per week was placed on the total amount of benefits people could claim, with reductions coming from housing benefit.

Illustration by Modern Activity

Illustration by Modern Activity

The flaws with all of these policies are obvious. It means people have less money to pay their rent, but their rents remain the same. Yes, it reduces housing benefit claims. But without tackling the cause of these claims – high rents – the reduction is short term, and will be offset by increased costs elsewhere, in the form of arrears and evictions. Moreover, the amount that can be cut is limited. If rents keep increasing – which they will do if the housing shortage is not tackled – so will housing benefit, regardless of how many salami-slicing tactics are employed.

The IPPR’s recent analysis concluded that 95 per cent of government spending on housing will go on subsidising rents through the benefit system, with just 5 per cent invested in building new homes. A welfare reduction strategy tackling the causes of benefit spending – the drivers of demand – would turn this on its head.

It would look, first and foremost, to the affordability of housing. A range of policy options to reduce rental prices have been mooted, with perhaps the most heavy-handed being the capping of rents. Though this may seem appealing in some quarters looking for a strong statement regarding the costs of living, in reality such a policy would be the mirror image of capping housing benefit – a short term solution, artificially distorting the flow of the housing market rather than tackling its drivers. Even Labour’s idea of limiting rental increases could prove risky by deflating prices relative to demand.

Nothing short of radically increasing the supply of housing will stem the tide of rental prices – and housing benefit costs – caused by a years of chronic under-building. The Chancellor, in announcing in the Budget a new garden city in Ebbsfleet with 15,000 homes , seemed to recognise the symbolic and political capital that comes with building a new town – but this plan (which had already been announced in 2012 with 22,000 houses, and had failed to materialise) is little more than a gesture when one considers the scale of the shortage. Ebbsfleet represents just 6 per cent of the 220,000 homes we need to build each year to meet demand.

So, how to build more? Help to Buy – which simply stimulates further demand – is clearly not the answer. We need to do two things – make land available and get Local Plans in order so that private developers can build; and encourage local authorities to start building again.

Many claim that government caps on what each council can borrow to build new homes is a major blockage, with the LGA pushing hard for lending caps to be lifted. With local authorities able to borrow more to build more, the investment would be recouped many times over in guaranteed rental income and reduced temporary accommodation costs as waiting lists are reduced. However, others claim capped borrowing is a red herring – and that many councils do not make use of their borrowing powers, with £1.4bn going untouched this year as councils are hesitant (or lack the skills) to make such investment when firefighting widespread cuts to services.

The solution, then, may be to reward local authorities currently using their allocation with less stringent borrowing caps, and encourage those who aren’t with a target to use at least 75 per cent of lending allocation to build new homes. Those reticent to build should be encouraged to do so in partnership with developers and housing associations who have the internal expertise.

And where to build? The Government is making the right noises by helping local authorities build on brownfield land, but with space for 200,000 homes, even if all brownfield is used as intended this is less than one year’s supply we need to keep up with population growth.

The Government needs to be more creative. Converting unused commercial and industrial premises needs to be at the top of the list, along with compulsory selling off of unused NHS and MOD land and making ‘sandwich’ developments the norm and not just found in top end sites. The Shard – with its mixed floors of flats, hotel and offices – is a posh sandwich, but having affordable flats in unused floors in colleges, police stations, offices and hospitals could bring new housing into prime locations. With £50-60m spent every year on maintaining NHS buildings that are either not used or not fit for purpose, it seems a sensible solution. UCL also calculated that 77,000 properties could by delivered with ‘overbuilding’ additional floors on tops of hospitals in London alone.

We also need to take a long, hard look at green belt. Building on brownfield is uncontroversial, but of limited impact. Large, bold developments need to move into the green. This isn’t as radical as it sounds when one realises ‘green belt’ is somewhat of a misnomer. A lot of it isn’t green at all. Despite popular belief, ‘green belt’ is not designated for its agricultural value, pristine hedgerows or wildlife, but as a planning strategy to fence in urban areas and prevent sprawl.

As a result, much is privately owned scrubland, over-farmed, fly-tipped and discarded from any real purpose. Analysis from Quod found that around a million homes could be built on ‘green belt’ land in London, 10 minutes’ walk from a station and with no environmental value other than it having ‘green belt’ designation. We need a strategy to look systematically at green belt – to separate the ‘green and pleasant land’ from the inaccessible bits of waste ground – and to protect the former and free up the owners of the latter to sell to housing developers.

This is not just about affordable rents – as politicians squabble over the predicament of ‘generation rent’, we should remember a lot of those renting would rather be buying if they could. Increasing supply of housing would also ease purchase prices, not just rental prices. And if the government really wants to boost supply, efforts should not only be made in affordable or first time buyer housing, but also for those at the other end of the housing ladder.

Millions of older people live in homes which are too big and unmanageable. It is true many feel emotionally tied to these piles, but polling suggests up to a third would be interested in downsizing if the right property were available, and a quarter express an interest in retirement housing. The problem is, this sort of stock just isn’t available. Just 1 per cent of older people live in retirement housing in this country (self-maintained apartments often in villages with cafes, gyms and the like) compared to 7 per cent in Australia and 11-15 per cent in the US.

While it isn’t for everyone, care village developers report waiting lists and new developments being snapped up years before they have been completed. If local planning regimes favoured these developments and the Government encouraged older people to consider downsizing (for example with a stamp duty exemption on downsizers over 65), and we perhaps managed to encourage a very modest 5 per cent of older people to move into retirement properties, that would free up about 660,000 family homes – homes that people moving up the housing ladder could move in to, freeing up more smaller properties for the first time buyers. The increased stamp-duty take from these moves would more than cover the cost of the exemption for the older people.

SECOND PRIORITY – TACKLING LOW WAGES

Of course, expensive housing (like expensive food and energy) is only problematic if wages don’t meet these costs. The fact that 93 per cent of new claims for housing benefit are from those in work is, therefore, highly significant. It shows that wages are simply not keeping up with housing costs.

In fact, there are now more people in poverty in work than out of work. As poverty in this country is defined by relative income (those living on less than 60 per cent of median income), this statistic tells us all too much about the level of inequality in our labour market. 6.1 million people are in work, but are ‘in poverty’. These are most likely to be in low paid, part time work, or temporary and unstable work. Unsurprisingly, research by the Resolution Foundation suggests that the minimum wage is no longer a floor in many sectors, but now the ‘going rate’. Combine this with a low or zero hours contract and it’s easy to see why a job no longer guarantees you can keep a roof over your head without state support.

With Housing Benefit, tax credits and income support, hundreds of millions of pounds are being spent each year to compensate for inadequate wage levels. Like housing benefit, which (until the benefit cap) enabled landlords to dictate ever higher rents in the knowledge that government would pay, tax credits similarly top up households whose employers pay very low wages. It is compensating for employers’ wage policies, without questioning whether these are appropriate.

But again, to tackle the benefits spend driven by low wages and underemployment, the government has adopted a clunky supply-side approach. Apart from cutting tax credits, the government is proposing ‘in-work conditionality’, which means restricting eligibility for in-work benefits or mandatory referrals to JobCentre Plus if you are not deemed to be working ‘enough’ to earn a decent wage – perhaps under £950 a month.

This is simply cutting off people’s in-work benefits, without tackling the reason why so many people are becoming eligible for them. This is likely to have disastrous effects when combined with an economy whose recovery is predicated on a burgeoning part-time and self-employed labour market. Recent employment statistics showed that while unemployment has fallen significantly, wage inflation has slowed – suggesting more people are taking lower-waged jobs (and one in five have ‘mini-jobs’ of 16-20 hours per week) in order to get back to work in difficult economic times.

Cutting housing benefit and tax credits will not tackle the underlying problem that wages are not keeping pace with the cost of living. Benefit increases have been capped at 1 per cent instead of inflation, to keep them artificially below stagnating wages to make sure the mantra ‘work always pays more than benefits’ rings true. But why are we allowing employers to set the bar and levelling benefits down?

A strategy to tackle the causes of welfare must, therefore, be a labour market policy. Tackling underemployment, addressing the steep withdrawal rates in the current tax credit system (something not adequately solved by the future Universal Credit regime) and more flexible and – of course – better-paid jobs are all areas for investigation.

On the last of these, the debate regarding a higher minimum wage, or a living wage, has been raging almost for as long as the minimum wage has existed. While evidence suggests fears regarding inflation and anti-competitiveness were originally unfounded, that has not stopped business leaders to warn against minimum wage increases that all three parties are now moving towards.

Labour’s idea of pegging the minimum wage to average wages is a good one – but to truly tackle the causes of welfare spending, the minimum wage needs to be set at a level which reduces or entirely removes dependency on the state for a full time worker. What would that wage be? Well, for a British person to bring their non-EU born partner to the UK, they must be earning £18,600 (it increases if you have dependent children). This would suggest the government believes you wouldn’t be a burden on the state, as an immigrant, if your partner earns this amount.

On the other hand, many means tested benefits use a £16,000 cut off, suggesting this might be deemed the income level at which you don’t really need state support. Someone working full time, on the current level of minimum wage, earns about £12,300 per year before tax. The minimum wage would have to increase from £6.31 to £8.21 and hour to ensure full time workers (without children) earned £16,000 a year before tax and freed themselves of needing state support – an amount substantially higher than the £7.65 an hour living wage, which is calculated based on the amount someone would need to have a decent standard of living.

The Resolution Foundation has published compelling research in this area, showing that in many sectors where minimum wages are the norm, employers could pay more without significantly effecting their margins. It would give the economy a shot in the arm through increased consumer spending, save the government hundreds of millions a year in benefits and tax credits and substantially increase tax take. Some of these savings could be redistributed to companies paying these higher wages through reduced business rates, and cutting out the inefficient middle link in the chain (i.e. the distribution regime of in-work benefits) in the process.

Nonetheless, such rates may seem worryingly high for those conscious of business sustainability. Perhaps, then, a lighter touch approach than a blanket increase would be to give employers more ‘skin in the game’ when it came to the wages they paid.

For example, those companies paying anything between, say the national minimum wage and the Living Wage and with high internal wage ratios (i.e. their executives earning, say, 100 or more times their front line workers) should be made to contribute towards the government’s tax credit bill in the form of a flat rate, per person levy, in recognition of the fact that it is the government who is essentially under-writing these wages. This might be set at half the average in-work benefit payment, reflecting a split in responsibility between the government and employer, and publishing an annual list of companies paying the highest levies. Employers could either increase their workers wages to reduce their levy, or pay up.

THIRD PRIORITY – BACK TO WORK SUPPORT

There will always be those who, rightly, are supported financially when they are too ill to work, or caring for someone else – some for all of their lives. But there are also millions of people locked out of the labour market unfairly, and primarily reliant on benefits for their income. From single parents to prematurely redundant older people, disabled people and carers to the long-term unemployed and under-skilled, many can and want to work but the combined effects of our particularly inflexible labour market and ineffective back to work support thwarts them. And it costs the economy billions per year in lost productivity and financial support.

In the longer term, any government set on reducing welfare spending and boosting the economy will need to make it possible for people to work as much as they can, when they can – but to do so, they will need to look hard at why our labour market is so reliant on inflexible, nine-to-five jobs. In the shorter term, and squarely within the reach of what a government can achieve fairly simply, is to shake up back to work support.

Many groups are poorly served by the government’s current offer, as more faith (and effort) is put in supply-side penalties (i.e. the cutting of benefits, increased conditionality and sanctioning) as a form of encouragement to get people to find a job. In this regard, the duality of the JobCentre Plus’s role – increasingly intended to both monitor compliance and sanction, while also provide advice and support – is illustrative of the systemic confusion of the government’s approach to welfare to work. It would be more effective if it were to split its functions and be able to develop positive and trust-based relationships with clients as a support organisation, while compliance and sanctioning was hived off to a separate body.

In reality, such incentives only motivate those consciously avoiding work. Those who find benefits provide higher income than the job they can secure need smoother withdrawal rates and, as per the second priority here, a government looking carefully at the wages being paid by companies at the bottom of the income scale.

These two special cases aside, we have the vast majority who want to work, but who cannot for a range of reasons. For these people, a better offer is in order. Let’s consider disabled people, whose unemployment rates were 50 per cent even in the pre-crisis boom years, as a case in point.

Latest figures available show the government is spending £8.5bn on ESA and IB each year. The DWP is extremely preoccupied with the idea that many are claiming when they should not – some ministers have ludicrously claimed 50 per cent – of sickness benefit claimants are, in fact, fit to work and claiming illegitimately. The response – another supply side measure of tightening assessment criteria so that nearly 40 per cent of those on IB are reassessed as fit for work and have their benefits withdrawn – has been (aside from the Bedroom Tax) the most controversial policy in the Government’s welfare reform agenda.

We must bear in mind that being found ‘fit to work’ is not an objective and verifiable status. The Work Capability Assessment is just that – an assessment of a person’s capability to do some work. In reality, hardly anyone is incapable of doing any work at all, but as Ben Baumberg explains in this issue of Demos Quarterly once a ‘real world’ test is considered and we ask ‘can this person find a job in the current labour market?’ the current assessment is quickly exposed as little more than the most basic of fitness tests, entirely unrelated to employability.

An assessment of actual employability would consider a disabled person’s abilities and limitations in the round – including one’s health, marketable skills and self-confidence. The back to work support provided would then look to fill these gaps, with each person likely to need a bespoke combination of condition management, psychological support, skills training, equipment to make workplaces accessible, and so on. It is hardly surprising the Work Programme, a one size fits all programme for all unemployed people, is falling so far short of expectations when it comes to disabled people. Just 6 per cent of new ESA claimants find work through it, compared to the DWP’s minimum performance target of 16.5 per cent. Job outcomes for those who have been claiming IB for several years is just 1.8 per cent.

Compare this to Work Choice, the employment programme dedicated to supporting disabled people, where 41 per cent of its clients are finding jobs. It shows that employment is an entirely achievable prospect for disabled people, even in the downturn, with the right back to work help. And yet access to this programme is both substantially limited, and without formal criteria to ensure those most likely to benefit from the programme can access it.

The solution to this problem is straightforward. The prospect of ‘bespoke’ packages of back to work support for disabled people might sound complex and expensive to deliver, but they really aren’t. Personal budgets are a tried and tested method of creating personalised support packages to meet individual needs in social care, widely used to great affect by many disabled people already. They could very easily be adopted by the Work Programme as a cost effective way of enabling disabled people to bring together all of the strands of support they need. Personal budgets in social care are given to disabled people at a rate set according to their assessed support needs. Purchasing services to meet those needs is then developed in a care plan, with each person’s plan reflecting the outcomes they hope to achieve.

In many cases, this already includes finding a job or volunteering. It would be a short, logical jump to replicate this process in back to work support, with transparent payment by results tariffs being converted into personal budgets and Work Programme providers acting as brokers in helping people to develop their back to work plans, navigate the market of the range of local authority and voluntary employment support services on offer, and make the relevant Access to Work applications.

Some providers are in fact already dabbling in this approach, with their clients being allocated a ‘virtual’ budget to pick from a menu of in-house options on offer. But there’s no reason why a personal budget should be restricted to one provider, in order to create a more competitive, outcomes driven market for Work Programme providers.

In addition to personal budgets for all disabled people using the Work Programme, marrying more effectively the health, skills, psychological and practical support each person needs, the (more costly) Work Choice should be accessed systematically through an eligibility assessment identifying those most in need of more intensive support.

A longer term, more radical change for a government truly dedicated to ensuring fullest possible employment among ill and disabled people, would be to treat unemployment as the major public health risk that it is. Longitudinal studies of hitherto healthy people have found that they experiences a 49 per cent increase in mortality rates if they became unemployed.

Such longitudinal studies also show unemployment is associated with poor health outcomes when controlling for socio-economic status, and at the same time, unemployment accounts for 81 per cent of differences in health outcomes between high and low SES groups. This makes unemployment a primary driver of health inequalities. It is the key reason why sickness benefits are so ‘sticky’ – unemployment makes people ill. It is no accident that 40 per cent of those on ESA for an illness also have a secondary mental health problem.

So let’s bring the Department of Health in on the fight to tackle it. The Department of Health’s Responsibility Deal already has a ‘health at work’ strand, alongside drinking, smoking, and physical activity. At the moment, however, this only looks at encouraging employers to help their employees stay healthy, by tackling stress in the workplace, musculoskeletal complaints, and so on. But what about getting people back into work to improve their health?

A Work Programme for ill and disabled people administered by the DH, to help those suffering the negative health effects of unemployment, would look very different to the DWP’s current efforts. Lessons from countless health and safety campaigns would be brought to bear, with nudge and positive reinforcement used to build people’s confidence in getting back to work. The use of personal budgets – mentioned above and accepted good practice in health and care policy – would be standard practice.

Good quality work experience would be a form of rehabilitation, not a sanction; CV, skills and confidence building would automatically be delivered alongside condition management, occupational therapy and psychological therapies. There would be a focus on securing a job that maintained one’s health, supported one’s rehabilitation or worked with the grain of one’s disability – not just ‘any job’ as is the current mantra – and follow-up in work support would be par for the course. This may sound like a brave new world to a Jobcentre Plus case manager but would seem pretty standard stuff for a social worker.

The long-term health savings (and productivity gains) of getting the hardest to employ back into work, and the reduction in mental and physical poor health, more than justifies diverting some of the £5bn spent on the Work Programme, and also the £2.7bn public health pot being given to local authorities each year being used to try out a combined effort.

THE LONG VIEW ON WELFARE REFORM

A welfare reform programme that built more homes across the entire housing chain, clawed back in-work benefits spending from employers, brought personal budgets into welfare to work programmes and treated unemployment as a public health challenge could serve to tackle the causes of demand for benefits, achieving significant and sustainable reductions. It could also help to reinvigorate the public’s confidence by using these savings to invest in a more contributory model – one that rewards contribution without penalising further those without a history of work.

The current approach – cutting off the supply of benefits artificially – causes, as we have seen, significant hardship without substantial reductions in benefits spending, and shunts costs elsewhere. But it is also fairly low cost, easier to implement and the gains made (the value of benefits cut) can be readily accounted for in the short-term and widely publicised for political credit.

It’s a seductive strategy – but short-lived, unlikely to continue to reap savings in the face of continued house price rises, economic pressures and demographic change: unless these underlying drivers of welfare spending are tackled. In May 2015 the next government, will have a 5-year window of opportunity to lay the ground work for this longer term reform. Will any party be willing to take it on?