Housing Benefit costs under the Labour Government rose to £20 billion per year as claimants and costs increased without any apparent effort to contain them. Press reports of some families living the high life in Kensington on housing benefit have scandalised those who struggle to pay their own mortgage or rent but Eric Pickles, the new Secretary of State for Communities and Local Government is set to cap the outrageous claims.
In London some rates are excessively high. For example, Local Housing Allowance rates for five bedroom properties in central London have risen as high as £2,000 per week (at July 2010 rates). However, even rates for two-bedroom properties can exceed £300 per week in some London areas.
A couple with one child spending a third of their gross income on accommodation would need a household income of over £45,000 a year to afford a rent of £290 a week, and would be in the top third of the household income distribution. More strikingly, a similar family would need an income of over £156,000 to afford a rent of £1,000 a week, and they would be in the top two per cent of the income distribution. What these reforms mean is that people receiving Housing Benefit may not be able to live in expensive city centres, but the same applies to most working families who do not receive benefit.
In the Emergency Budget on 22 June, the Government announced changes to the Local Housing Allowance, which have now been confirmed.
From April 2011 the Government will:
• remove the five bedroom Local Housing Allowance rate so that the maximum level is for a four bedroom property.
• introduce absolute caps so that Local Housing Allowance rates cannot exceed:
£250 for a one bedroom property,
£290 for a two bedroom property,
£340 for a three bedroom property,
£400 for a four bedroom property.
In addition, the £15 weekly excess that some customers can receive under the Local Housing Allowance arrangements will be removed. This change was first announced by the previous administration in Budget 2009 but they subsequently decided to defer it until April 2011.
Reasons for the changes
Housing Benefit expenditure has ballooned in the past 10 years, from £11 billion in 1999/2000 to £20 billion in 2009/10, in cash terms. Within this total, expenditure on working age recipients has increased from £7 billion to over £14 billion. Without reform, total expenditure is forecast to reach £25 billion by 2015/16, a further rise of 24 per cent. This is unsustainable in any economic climate, but the need to tackle the record deficit makes reform even more pressing.
The Government says that the overall cost of Housing Benefit must be controlled and constrained. The package of measures being introduced for the Local Housing Allowance in 2011/12, including the removal of the £15 excess planned by the previous administration, will achieve savings of around £1 billion by 2015/16. The other changes to Housing Benefit announced in the June Budget are estimated to save a further £1.1 billion in 2015/16. Overall, this represents a reduction of nine per cent in the total 2015/16 expenditure on Housing Benefit.
Impacts of the changes
The Impacts of Housing Benefit proposals: Changes to the Local Housing Allowance to be introduced in 2011-12 is produced in three parts. The first shows the impact compared to now of the Local Housing Allowance measures that the previous administration had decided to implement:
removing the £15 excess, and
taking out the top one per cent of rents at a national level from the market evidence database.
The second shows the impact compared to now of the measures which are being introduced in 2011/12, including those announced by the Government in the Budget on 22 June. And the third part considers the additional impact of the measures contained in the June Budget compared to those announced by the previous administration.
The changes already announced by the previous administration would have made 49 per cent of Housing Benefit recipients assessed under the Local Housing Allowance worse off by an average of £12 a week. Together with the package announced in the June Budget, the overall impact of the changes which are being introduced would be to reduce Local Housing Allowance entitlements by an average of £12 a week, based on current rent levels and accommodation choices. However, the purpose of reform is to influence rent levels and housing choices, which is likely to mitigate the impact of these measures.
Click here to download: Impacts of Housing Benefit proposals: Changes to the Local Housing Allowance to be introduced in 2011-12