Denationalizing housing benefit would make everybody happy

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The problem with the housing benefit row, as with the broader row over the welfare cuts, is that many have lost sight of a simple fact: that incentives matter.

The government’s proposals would cap housing benefit at £20,000 per year. Iain Dale has already posted a good response to this on his blog – a quick look at the property section of Gumtree shows that £20,000 per year is plenty of money to rent a spacious house within travel range of anywhere in London. As Iain’s correspondent says, maybe these houses aren’t on Kensington High Street, but how many of ours are?

There is an injustice in asking people who commute for an hour a day into London to work to subsidize people who do not work to live in the most desireable parts of the city. As with so many welfare schemes, there is a net transfer of wealth from the working to the idle dressed up in the name of compassion.

But this is only half the problem. The other half is the perverse incentives that the current housing benefit system creates. Welfare rewards failure – this is a tautology, and does not necessarily outweigh the compassionate argument for welfare. But by rewarding failure with state subsidized houses in highly desireable areas, the system makes failure a more attractive option than success for many people.

The welfare system is necessarily blind to circumstances, to prevent bureaucrats from abusing their positions of power as the sole arbiters of welfare. If the welfare system was denationalized and delegated to private organizations (I am resisting the urge to invoke the ‘Big Society’) it would allow for a multitude of organizations that could look at circumstances and give to the genuinely needy.

Any worries about a lack of private giving should be quickly dispelled when you consider how many people are ‘outraged’ at these cuts. Doubtless, they would jump at the chance to give their money to a charity that pays for Kensington mansions for the unemployed, allowing the rest of us to give our money to people we see as being more needy in a more equitable way.

Many talk about the difference between the ‘deserving poor’ and the ‘undeserving poor’. Some of this is the eye of the beholder – I don’t want to pay for anybody to live in a house in Kensington, but perhaps Polly Toynbee does. A privatized approach to welfare would leave us both happy, and allow for a welfare system that does not systemically encourage failure.

Government adopts ASI pension plan

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The speed with which this government is adopting Adam Smith Institute ideas amazes even me. This time it is the state pension. Back in 2004, we published a report (.pdf) by pensions expert Alan Pickering, Chair of the European Federation for Retirement Provision. Its radical proposal was to roughly double the state basic pension and roll the state second pension into it. Not a cheap proposal – but Pickering calculated that it would be easily affordable by raising the retirement age to 68. The advantage of that would be that everyone would retire on a decent income that guaranteed they didn't have to rely on other state benefits. And it would end the absurd situation with Pension Credit, where people in work would be better off spending their money rather than saving it, because means-testing would ensure that they would be no differently off when they retired.

The government isn't doubling the pension, and it is only raising the retirement age to 66, but today comes another announcement that things are heading in the direction we proposed in 2004. The state basic pension is being raised to £140 per week – roughly a 40% increase, so well on the way to what we proposed. It means that the curse of means-tested retirement benefits can be ended, and that people once again have a positive incentive to put something extra by for their retirement if they possibly can. And, as we proposed, women will be entitled to exactly the same pension as men – ending the situation where millions of women received only partial pensions because they had taken time off work to raise families, and so did not have a full record of contributions.

These proposals from the government are a good start that will get the nation saving again. I still believe that the pension age will have to be raised beyond 66 in order to pay for them, and that this would be the right thing to do. In 2004, our author Alan Pickering reckoned that the whole change could be done within four years, by 2008. The coalition have a bit of catching up to do.

When waving the bloodied shirt doesn't engender the desired reaction

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There are times when writers give us an example of what they clearly see to be an iniquity, expecting us to agree with them. Just such an example here, talking about the decision that council (and social) rents should now be 80% of market rents:

Across England as a whole, 80% of the average weekly market rent for a three-bedroom property is £249, which rises to £350 in London. The comparable social rents are £84.56 across England and £110 in London.

My reaction is that this is indeed iniquitous: that there are any such subsidies to social rents at all. Council rents should be at 100% of market rents and, given my well known practice of listening to dissenting views, I shall scream in rage at anyone who dares differ.

Now note, I'm entirely happy with the idea of subsidising housing for those who otherwise would not be able to afford housing, I am after all a bleeding heart liberal. It's just that I'm a bleeding heart classical liberal and I want such subsidies to be out there in the open, not hidden as opportunity costs. One report tells me that there are about 4 million social housing units in England. No, they're not all 3 bedders, but taking that average discount to market rent of about £200 a week that's....eek! That's £40 billion a year in subsidies. And yes, charging lower than market rent really is a subsidy, it's money foregone.

So I would argue that such rents should be entirely market rents: we may end up having to pay that £40 billion back again as housing benefit but I'd still prefer to have such subsidies out in the open, not hidden away where no one notices them.

And of course we wouldn't have to pay out that £40 billion again, not all of it. For the crazed way in which we allocate social housing is that if at some point in your life you do need it, if you are too poor to be able to afford market prices, then we give you that subsidy for the whole of your life (and yea, even on into your childrens' lifetimes as well). It's as if you, once requiring taxpayers' cash because you're out of work, those checks will just keep rolling in over the generations even when you've found another job.

As I find myself continually repeating these days: yes, I'm quite happy with the idea that we'll ameliorate some of the rougher edges of market outcomes. Subsidise, for example, those left grasping firmly the ordure stained end of the stick. But I still want us to be using markets as the pricing and allocation mechanisms: precisely so that we don't get these absurdities as we do with social housing, where we've a £40 billion subsidy that no one seems to even recognise, let alone acknowledge.

David Cameron's flirtation with libertarianism?

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Although I’m usually not a fan of the Prime Minister’s, I don’t agree with people like Janet Daley that his party conference speech was dull. In fact, I thought it was one of the most exciting speeches from a politician in office that I’ve heard in a while, and it suggests that the coalition government might be prepared to be radical on market reform. I’m wary of reading much into political rhetoric but together with this week’s policy announcements, which I broadly welcome, there is cause for optimism.

I’ve already written about the proposals to cut child benefit for high income earners. I’m broadly in favour of them, although they should be coupled with reductions in income tax and their implementation leaves a lot to be desired. But what’s really interesting about these is that they tackle the idea of ‘universality’ in benefits – that is, the idea that everyone should pay into a big government pot, and that everyone should get something from that government pot. This is bad economics, because it assumes that ‘the rich’ are a bottomless pit of tax revenue, and it is also bad for society.

Benefit universality reduces personal responsibility and reduces choice by roping everybody into a single, one-size-fits-all system irrespective of their wants or needs. It says that one way of living is good – in the case of child benefit, having children – and one way is bad – in this case, not having children. Cameron’s speech, which touched on this issue, put the question into a wider perspective of promoting personal responsibility. I still haven’t figured out what the “Big Society” is, but if it is about removing the state from people’s decisions about their private lives, it might not be worthless.

The cuts are tiny in terms of overall government expenditures, but they set an important precedent: that welfare should provide a safety net for people in dire need, not be a second stream of income for the bulk of the population. Along with Michael Gove’s free schools and Iain Duncan Smith’s moves towards a single, unified benefits system, this speech potentially has big implications for the future of the British welfare state. We may be seeing the start of a move away from the state-providing model of welfare, where ministers run the health service and education system, towards a state-facilitating model, where the government gives a monetary welfare safety net to the country’s poorest while allowing individuals in society to handle the rest.

More on child benefit

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I basically agree with Sam's take on the end of universal child benefit. When resources are scarce, you should target them on those most in need. Giving benefits to families earning twice the average wage at a time when you are trying to reduce spending seems an odd policy. But there are certainly problems with the way this change - taking the child credit away from higher-rate taxpayers - has been designed.

The obvious one is that a single-earner household earning £45,000 will lost the benefit, while a two-earner household could potentially still receive it while bringing in £88,000. This seems both absurd and unfair. But another serious issue is that withdrawing child benefit in this way will create very high effective rates of marginal taxation for people crossing the boundary from the basic- to the  higher-rate income tax bracket. It is undoubtedly peculiar that while welfare secretary Iain Duncan Smith is doing his best to get rid of high marginal deduction rates for the unemployed, chancellor George Osborne is recreating them further up the income scale.

But that highlights a broader point - does it really make sense for one government department to be announcing all sorts of ad-hoc tinkering with the welfare system, while another is bringing forward a radical overhaul of the entire system? It does seem to me that a better approach to this issue would be to abolish the child benefit altogether, incorporating a 'child element' into the proposed universal credit for the unemployed (and those on low incomes), while putting some of the savings towards raising income tax allowances across-the-board - which would soften the blow for working families. 

Giving Osborne the benefit of the doubt

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I went on Radio 5 Live on Monday night to discuss the government's proposals to remove child benefit for people earning in the high income bracket last night, which you can listen to here. My overall point was simple, and a repetition of my post on Monday: cuts in benefit have to be made, and it is right that the first cuts be made in welfare payments to the richer sections of society. If there is a welfare safety net, let's target it to the people most in need.

I was bewildered to hear the head of the Child Poverty Action Group arguing against this. Although the lives of people earning over £44,000 a year are often hard, nobody could call that poverty when the average wage in the UK is closer to £26,000. As I said on the radio, I think that a lot of the arguments against these cuts coming from groups like the CPAG are strategic – they are aimed at protecting the welfare state by fighting any effort to roll it back, no matter how sensible. This sort of ideological opposition to cuts in any form are wrong. We have to be pragmatic.

Most of the callers were concerned about the fact that couples where both families work and earn less than £44,000 each will still get the benefit. They are absolutely right to be angry – it's ludicrous that families bringing in up to £88,000 a year are receiving government benefits, and I hope that the Treasury finds a way to cheaply avoid this situation. Means-testing would likely cost a prohibitive amount, reducing some of the savings that will be made – there is no point in cutting off your nose to spite your face in the interests of 'fairness'. As I said last night, the real issue here is whether it's just for people with children to be given welfare paid for by taxes on people poorer than them, on childless people, and on pensioners.

The caller whose point most resonated with me was Matt, who spoke about the difficult job and long hours he works for his family. Once he's worked long enough to be on the higher rate of tax, after tax, national insurance and pension deductions he only takes home around 40p out of every pound he earns. In other words, the taxation is so high in Britain that it's generally not worth his while to keep working once he reaches the higher tax threshold. This hurts him and his family, and reduces the amount of money taken in by the Exchequer. But Matt's case isn't an argument for higher benefits for people like him: it's an argument for lower, flatter taxes.

A benefit screw-up

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Yesterday the Chancellor announced the great idea of withdrawing child allowances from those who shouldn't need them. It’s such a great idea that, desperate for money as he is, he has deferred it to 2013.

To avoid the expense of means testing, he plans to give all mothers child allowances, as now, but then ask “households with a higher rate taxpayer” to own up to taking the money on their tax returns. Then the Revenue will add the allowances to the tax bill. Give the mother the money and then take it back from the richest member of the household who may, of course, be a lodger.

But “households” don’t do tax returns, individuals do. So, whose tax return does it go on if the mother has little or no income? And suppose the mother forgets to tell the higher rate taxpayer that she’s had the money? Or he forgets?

The tax advantage of not being married, or in a formal partnership, will increase sharply. Didn’t David Cameron make a big fuss about promoting marriage? This does the opposite.

Finally, the bureaucracy in administering all this will increase sharply.

Osborne has made this change in a ham-fisted way that will remove most of the good that comes from it, and missed an opportunity for better reforms. Even Gordon Brown wouldn't have dreamt up an approach as silly.

Welfare: the future is private

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In the UK it has become a moral duty of the state to provide financial support to the unemployed, despite the fact that its current model is unsustainable, with almost four million UK households having no adults in work. We have become reliant on government doing things for us, but this doesn’t have to be the case. Historically a number of charitable groups, churches and mutuals used to provide support for the unemployed when necessary and I believe this is a model we should increasingly seek to replicate.

Fortunately this ties in with one of the key aims of the Conservative’s Big Society agenda: to support and encourage co-ops, mutuals, charities and social enterprises. As Tom has rightly pointed out, there is always a danger of ending up with a government-planned society. What we don’t need is government-run initiatives and social enterprises, but for government to simply step back and see civic groups take over the task and fill any new gaps in welfare provision.

To some, this may not sound very caring, but I would argue the current system is much crueler. Unemployment welfare is impersonal, it doesn’t provide enough help to get people back into work, and under the last government it created perverse incentives, trapping people in poverty. In contrast to this, there are a number of charities who play an important role in reintegrating people into the workforce and making them self-sufficient. The role these groups play should not be undermined – they offer a tailored service, mentoring systems and accountable relationships to address the diverse reasons for the individual’s unemployment. But they can do more than just act as a compliment to the state funded benefits. I believe they can take over the role of financial support too (depending on whether the government is prepared to create more incentives for philanthropic endeavours).

My own Church is a case in point. Every church member has the opportunity to give to an alms fund to help members of the congregation or local community in need of financial support. Many choose to give regularly, knowing that the pastoral team in the church will not only ensure the money goes to the right people, but that they will also take the time to mentor the individuals in question, help reintegrate them into the workforce, and support them during a difficult time. And where possible they try to provide some employment to these individuals, whether through building works at the church, administration or in childcare. As a result of this, the church is for many their first source of support rather than the government.

If government welfare was scaled back, churches and other organizations in the local community can be injected with a new vitality to serve the most needy in their area and to offer a quality of advice, support and job opportunities that are so badly needed. And most importantly this provision will provide a tailored, local and personal service that could never be achieved through state welfare systems.

The family is the best agent of welfare

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Perhaps it is time we thought about asking families to pick up more of the strain.

Targeted welfare

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Our welfare system has lost focus. Originally designed to support those suffering hardship, it has mutated into an unwieldy creature that is increasingly unfit to perform the function it was instituted for. Now that the vast majority of British people are recipients of state benefits, the welfare system diverts valuable resources, both human and financial, to those whom do not need them at the expense of those whom do.

Many of the 51 different benefits and tax credits available, such as Child Benefit, are paid universally; both to those whose incomes are great and to those who struggle to get by on very little. A report published by Reform last year identifies £30.9bn of such benefits that are paid every year to ‘middle-class’ households (where ‘middle class’ households are, conservatively, defined as those whose annual incomes exceed £15,000 per adult and £5,000 per child). Surely it is only a failed system that spends such sums supporting the self-sufficient whilst the number earning less than 40% of the median income is rising?

This lack of priorities becomes even more apparent if we consider what £30.9bn buys us when it is targeted further down the income distribution. Not only can it cover the up-front costs of IDS’ proposed welfare reforms ten times over, it is enough to raise the income of every person in Britain earning less than £12,000 a year by £3,120. Whether it should be put to these exact uses is off the point; these examples only serve to show how poorly welfare expenditure is targeted at present.

Given the dire state of the nation’s finances, it is now as urgent as it is has always been sensible to ensure that our public services perform their intended functions efficiently. Benefits to middle-income earners need to be scaled back so that the welfare system can regain its focus; better helping the unemployed into work and providing support to low-income earners.