The Myths of the Benefit Cap

“People on benefits can be getting as much as a higher-rate taxpayer” – Iain Duncan Smith

“The Benefit Cap has a very simple principle at its heart: no family that’s out of work should receive more in total benefits than the average family gets in work” – George Osborne

“We have been encouraging working-age people to have children and not work” – David Cameron

Since 1 April, the benefit cap applies in four London boroughs: Bromley, Croydon, Enfield and Haringey, and will be applied nationally from 15 July. It caps the total benefits a household can receive at £26,000 (roughly equivalent to the median full-time wage).

Instinctively many people – 62% according to an IPSOS-MORIpoll – favour such a limit on the receipt of welfare benefits.

There are many problems with this benefit cap:

1. It takes no account of need.

Families are capped at £26,000 regardless of whether there are three, five or fifteen people living in the household. While many people seemingly disapprove of people having large families that are supported (often only temporarily) by social security, it is doubtful that equates to wanting the children of those families to suffer as a result.

As Ipsos-MORI pollster Ben Page says 

@andrewfisher79@barbaraweed agree that most don't think thru implications for children- just shows widespread resentment at tiny minority
— Ben Page, Ipsos MORI (@benatipsosmori) April 4, 2013

2. It does not compare like-for-like income

Many of those in-work households earning £26,000 or less also receive child benefit, child tax credits, working tax credit and housing benefit (93% of new housing benefit claims in the last two years are from households in which at least one person works). And so the out-of-work household is not receiving anything that a low income in-work household cannot also claim in the case of child benefit, child tax credit and housing benefit.

If you add together total income – from benefits and work – it is, I would suggest, almost (if not actually) impossible for individuals in out-of-work households to be better off per capita than those in in-work households.

3. It protects landlords’ subsidy while cutting poor people’s living standards

Households only breach the benefit cap due to the cost of housing benefit. Housing benefit is paid from the state to landlords, the household sees none of the money at any point, and has no control over the rent charged. It is a state subsidy for private landlords (edit 05/04/13: today the Daily Telegraph describes housing benefit as "allowing private landlords to game the government for excessively high rents. This in turn has spawned a new, and largely parasitic, industry in buy-to-let.") 

If benefits are capped, there are three obvious scenarios: a) the private landlord will benevolently drop the rent (this won’t happen as there is a housing shortage and the landlord could find tenants who will pay full rate); b) the family is forced out of their home and into more overcrowded accommodation or to move out of their local area (with bad consequences for the children’s education and the family’s local support networks); or c) their already low benefits are cut and their living standards drop.

Over five million people currently claim housing benefit. In the last two years 93% of new claimants have been from household in which at least one person is working. Housing costs in the UK are so expensive that the state is subsidising even working households to pay private landlords inflated rents.

We should be capping rents not benefits as this ‘Who benefits?’ flyershows.

4. No one is arguing that any single benefit is too generous

The welfare system in the UK is entirely means-tested. A tiny amount of fraud aside, people get what receive in social security based on their needs.

Of the benefits included in the benefits cap:

• Jobseeker’s Allowance (JSA) is worth just 14% of average full-time earnings; 11% if you’re under-25. It is worth only 31% of working full-time on the minimum wage
• Child benefit is £20.30 per week for your first child and £13.40 for each subsequent child – if anyone thinks that covers the cost of a child and incentivises
• Child tax credits are pretty difficult to calculate (depends massively on personal circumstances) but are higher if you have childcare costs for which you can only generally claim if you are working
• Income Support – which you only get if you are a carer or a lone parent with a child under 5 (i.e. have caring responsibilities). Income support is paid at the same rate as JSA (see above).
• Carer’s Allowance – which is £58.45 a week to look after someone with substantial caring needs for at least 35 hours per week. So this is someone doing the equivalent of a full-time job for at best £1.67 per hour.

Despite many politicians arguing in favour of a benefits cap, I have not heard a single politician argue that any of these benefits are too generous. Given all of these benefits are need-based and not overly generous then the argument that some people are getting too much is nonsense.