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.

Better off on benefits? The benefit cap could leave some children living on just £2.20 per day.

I live in Croydon - one of the four London boroughs (the others are Bromley, Enfield and Haringey) that since yesterday is piloting the benefits cap, before the national roll-out on 15 July.

This policy means that no household - no matter how many people live in it, and no matter their situation, can receive more than £26,000 per year in benefits.

The Work & Pensions Secretary, Iain Duncan Smith MP, says: 

"It’s sheer madness that people on benefits can be getting as much as a higher-rate taxpayer earns. We need a welfare state that acts as a safety net and encourages people back to work, not traps them in out-of-work dependency." (reference)

He says this without presenting any evidence, and it is loyally parroted by his backbench MPs - including Croydon Central's Tory MP, who says:

.@insidecroydon But on this issue I often meet constituents who are fed up paying for others to have a better lifestyle than themselves
— Gavin Barwell MP (@GavinBarwellMP) April 1, 2013

So is it true - and how could it be? Let's try to calculate. Let's start with three variations of a two parent family of three (all figures rounded to nearest £; tax credits figures via HMRC Tax Credits calculator).

Firstly where one parent works and the other doesn't (assume the youngest child is under 3 and the second parent is caring for them). To make work as low paying as possible, let's put that parent on the minimum wage of £6.19 per hour. If they're working a full-time job (37 hours per week). So here is their annual income:

Wage: £11,910

Child Benefit: £2,449

Child Tax Credit: £4,888

Working Tax Credit: £1,404

Total household income: £20,651

Secondly, where both parents work. To make work as low paying as possible, let's put both parents on the minimum wage of £6.19 per hour. One working a full-time job (37 hours per week) and the other part-time (21 hours per week). So here is their annual income:

Wage: £18,669

Child Benefit: £2,449

Child Tax Credit: £4,888

Working Tax Credit: £1,092

Total household income: £27,098

Finally let's have a household where neither parent works. Both are claiming Jobseeker's Allowance:

Wage: £0

JSA: £5,795

Child Benefit: £2,449

Child Tax Credit: £1,228

Working Tax Credit: £0

Total household income: £9,472

So where's the benefit in not working? Really I'm at a loss to find it. What about more unusual households?

Just to give the Daily Mail a chance, let's re-run the out-of-work household with eight children:

Wage: £0

JSA: £5,795

Child Benefit: £5,933

Child Tax Credit: £12,584

Working Tax Credit: £0

Total household income: £24,312

So even with eight children our unemployed household still doesn't reach the benefit cap level - and that's split between ten people - each living on the equivalent of £46.75 per week. That is the reality of our generous benefits system.

Politicians add in what I call 'landlord subsidy' (officially known as housing benefit). This of course does not make the family 'better off'. The transaction is between the state and the private landlord - the family sees none of the money at any point. If rental prices dropped they would see no money, if rental costs rise they see no less.

According to the Rightmove website, the cheapest five-bedroom property (the bare minimum for a family of 10) in Croydon is £1500 pcm or £18,000 p.a.

Added to the total household income that makes £42,312 pa - over the £26,000 benefit cap. So the household income through social security will be capped at £8,000 instead of £24,312 (as the reality is that private landlords won't cut rents and councils can't provide council housing). This means each of the ten people in the house (2 adults and 8 children) will be living on just £15.38 per week or £2.20 per day.

This is the brutal reality of the benefits cap: £2.20 per day to eat, pay the bills, and buy clothes.

This is why the Child Poverty Action Group calculates that an additional 200,000 children will be living in poverty this year, rising to an extra 1 million by 2020.

Iain Duncan Smith, smoke and mirrors, and pensioners

A long campaign of the UK pensioner movement has been to restore the link with earnings.

One of the first acts of the coalition government was to do that with a new 'triple lock' - meaning pensions would rise by the greater of earnings, inflation or 2.5%. However, inflation was redefined as CPI rather than RPI. In a parliamentary debate last month, LEAP chair John McDonnell asked the Minister 'Did the Minister ever consider a quadruple lock so that, earnings or inflation, CPI or RPI, whichever was the higher, would be used?

The fact is that because of stagnating wages and rising inflation (on the more comprehensive RPI measure) the 'triple lock' may in the short term provide pensioners with a real terms cut, as even the Pensions Minister was eventually forced to admit.

Pensioners and pension campaigners were inevitably cautious when Iain Duncan Smith, author of what the LRC describes as the "pernicious and dogmatic" Welfare Reform Bill, allowed it to be leaked to the press that he might uprate the basic state pension to £140 per week, and scrap means-testing.

With the basic state pension currently languishing at £97 plus change per week (increasing to £102 in April) that might seem some considerable largesse. However, Pension Credit - Labour's means-tested minimum guarantee - will be worth £137.35 per week from April.

If IDS introduced his rumoured £140 per week basic state pension from April 2012, then that would be a real terms cut for those in receipt of Pension Credit (137.35 plus inflation of say 4.5% would mean £143.53 per week from April 2012. However, mitigating circumstances in IDS's favour would be the fact that means-tested Pension Credit only reaches about 66% of those entitled to it - so one-third of the poorest pensioners are missing out.

As an aside £16 billion in benefits goes unclaimed every year. Far more than the £1.5 billion lost in fraud or the £3.5 billion lost due to errors (by officials and claimants combined)

But the real issue is being missed. Why is that £140 is the rate under discussion, when the pensioner poverty line is £170 per week?

The problem is that the UK pays an appallingly low level of pensions, which leaves over 2 million pensioners in poverty and 3.5 million in fuel poverty. Pension expenditure accounts for just 6% of our GDP, compared with 12% in France and 10% in Germany.

Until this is addressed, Iain Duncan Smith cannot expect, and certainly won't receive many cheers from pensioners (present and future), especially when his government is cutting local services on which pensioners rely: libraries, day centres, social care, etc.

Today's Morning Star also demolishes IDS's bluster under the title 'Duncan Smith fails to convince on pensions'