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Careful reform of the£12bn a year housing benefit system is crucial if the government is to meet its key welfare o...
Careful reform of the£12bn a year housing benefit system is crucial if the government is to meet its key welfare objective of ensuring that work pays, according to two reports published today. They argue that changing the means-tested benefit - paid to 4.6 million tenants in rented accommodation - is a major item of unfinished business left by the announcements on a Working Families Tax Credit and a National Minimum Wage.

- A study for the Joseph Rowntree Foundation by Peter Kemp of the University of Glasgow, describes how housing benefit not only contributes to the 'poverty trap' where claimants lose benefit as earnings from work increase, but also leads to inefficiency in the social housing sector. Professor Kemp's options for phased reform of the system, include a possible 'housing tax credit' based on average local rents.

- A report by Steve Wilcox of the University of York, jointly commissioned by the Chartered Institute of Housing, Council of Mortgage Lenders, the Local Government Association, the National Housing Federation and the Joseph Rowntree Foundation, urges the government to consider introducing a 'work credit' system that offers support to low income home buyers as well as tenants.

Time for reform

Professor Kemp's review shows how spending on housing benefit has risen significantly faster than price inflation during the past ten years. The increase is the result of a deliberate shift from subsidies paid to councils and housing associations to keep down rents, to benefits paid directly to low income tenants. Total public assistance for housing, including tax relief for mortgage payers, has remained broadly constant in real terms since 1988-9.

The study acknowledges that a decision to reverse the previous government's policy, by increasing subsidies to housing providers - and reducing rents - would cut the number of tenants receiving housing benefit and help to reduce dependency. But it warns that the problems with the benefit system would still remain.

The existing flaws that Professor Kemp highlights include:

- the withdrawal of benefit as income from work rises, leaving recipients little better off from getting more pay;

- the lack of incentives for those receiving 100 per cent of rent through housing benefit to 'shop around' for cheaper accommodation, or to move to a small home if their present accommodation is larger than they need;

- a 'two-tier' system resulting from recent changes in housing benefit affecting private tenants with deregulated tenancies who are now treated differently from housing association and council tenants.

Among the options for reform set out in the report are:

- replacing housing benefit with a housing tax credit based on average local rents, differentiating between private, housing association and local authority tenants;

- a 'housing allowance' scheme for private tenants to subsidise the gap between their actual rent and a minimum rent contribution;

- over time, keeping social housing rents below market levels, but linking them more closely to local property values; and paying housing benefit direct to council tenants;

- requiring social housing tenants to pay a notional rent contribution from their income, with a corresponding rise in baseline social security payments.

Towards a 'work credit' scheme?

The second report, by Steve Wilcox, stresses that housing costs are by far the biggest single item in most household budgets. Consequently, the government's welfare to work strategy cannot hope to succeed unless housing benefit reform is addressed.

Looking at the proposals for a working families tax credit and a national minimum wage it calculates that many low income families with rents below£45 a week will be floated off housing benefit. But for those with higher rents, entitlement to the tax credit and to housing benefit will continue to overlap, leaving a 'trap' where recipients could lose between 89p and 95p in benefit for every extra pound earned.

The existing housing benefit system also does nothing to help home buyers if unemployment, sickness or other problems affect their ability to keep up with the mortgage.

The report reviews the advantages and disadvantages of a number of options for phased reform of housing benefit. It suggests that the most promising among these would be:

- action to restrain rises in housing association and some council rents;.

- harmonisation of the working families tax credit and housing benefit to create a 'work credit' scheme where proper account is taken of housing costs. Such a scheme would simplify the structure of in-work benefits, delivering a clearer 'work pays' message to those thinking of taking a low-paid job;

- extending this work credit scheme to cover low income home buyers;

While recognising the government's interest in the possibility of making households responsible for paying at least some of their rent from base income - instead of having 100 per cent covered by housing benefit - the report urges caution. In particular, it stresses that such a move would need to take account of local rent levels which vary widely across the country.

Note to Editors

Housing Benefit: Time for reform by Peter Kemp is published by the Joseph Rowntree Foundation and available from York Publishing Services, 64 Hallfield Road, Layerthrope, York YO31 7ZX (01904 430033) price£11.95, plus£1.50 p&p. A summary of findings is available on LGCnet.

Unfinished business: housing costs and the reform of welfare benefits by Steve Wilcox is available from Chartered Institute of Housing Publications, Octavia House, Westwood Way, Coventry, CV4 8JP (01203 851752), price£10 plus£1.50 p&p.

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