Tuesday, 26 June 2012

Looking at the consequences of proposed benefit changes part one

The Conservative party wants to talk more about the poverty and welfare, this began with Government proposals to redefine poverty (which my colleague Paul talked about here) and has continued with David Cameron giving an interview with the Mail On Sunday, a speech on Monday and in a host of other media appearances by senior members of the party. Whilst there are no concrete proposals there have been some rough ideas which have been floated in the press. Today I’m going to focus on the proposal to cut housing benefit for those under 25. Tomorrow I’ll look at some of the ideas raised about perverse incentives. These initiatives may have public support due to a majority of people believing that less should be spent on welfare, but the consequences will be less popular.

The idea of removing housing benefit from people under 25 was first floated in April and has now reappeared. Attempts were made to justify the cut by stating that it was unfair that some had to live at home and save for their first home, whilst others went out and got it from the council. As soon as it was mentioned in April Shelter and a host of other charities pointed out the obvious flaw in the idea. Many young people simply don’t have a home to go back to. This morning senior Conservatives were making it clear that there would be exemptions from this cut for people leaving the care system and possibly others. How far these exemptions stretch will be one breaking point for this proposal. Does it include young people whose parent’s home is too small? If it doesn’t then it could lead to the family being forced to move into a larger home and the government having to pay increased housing benefit to the parents, therefore saving no money at all. It could also lead to increased numbers of young people being declared homeless and the government having to spend even more money on temporary accommodation and expensive homelessness services. Does it include young people who are no longer in touch with their parents or were forced out of their family home? If not there will be more homelessness and more young people left without support.

The other problem with removing housing benefit form people under 25 is that it will force many of them out of work. Housing benefit is not an out of work benefit and the majority of new claimants are in employment. For those under 25 housing benefit often is used as support for those moving away from home to get a job. A young person who moves to a different area to get a job for four days a week may still need housing benefit in order to pay their rent. If that support of housing benefit is removed, then they may not take the job. This has three potential negative effects. Firstly there is the obvious economic loss of the activity from that job and taxes paid from those earnings. Second, that job could provide the young person with experience which may help them to get a higher paying job in the future. Third, when people are unemployed at a young age there can be a “scarring” effect. This means for the rest of that person’s life they become less strongly attached to the labour market. They are less likely to find a job and more likely to only stay in that job for a short amount of time.  Exempting only those currently employed from this cut would not eliminate these effects. Much of the employment market for low paid individuals (in which the under 25s are disproportionately represented) is in temporary work. If an individual moves work but then finds themselves temporarily out of work housing benefit can provide a stop gap between different jobs.

Analysis from the Institute of Fiscal Studies has shown that over the last fifteen years poverty rates among young people have risen and since the recession employment rates for young people have plummeted. If this policy was introduced it would simply present a further barrier between young people and work, forcing them into poverty. As the government has repeatedly said work is the best way of people getting out of poverty, but cutting benefits is not the best way to get people into work.