The benefits cap debate – a win for Ministers, and an economic fail for critics

Posted on January 1, 2012

The furore over Iain Duncan Smith’s proposed benefits cap was predictable, and Ministers have merrily sailed into it for two reasons – because a high profile fight on this topic brings them an electoral advantage, and because they knew the Left would swallow the bait in one great, unthinking gulp.

The idea that no household should get more than £26,000 in benefits – equivalent to a pre-tax salary of £35,000 – is overwhelmingly popular. British voters subscribe to a strong idea of fairness, particularly when it comes to the idea that working should be more rewarding than not working, and they have been outraged by numerous reports of large families living at no cost to themselves in huge, overpriced houses in particular.

The critique of the proposals coming from the Left, notably from Lib Dem Guardianista Tim Leunig, is fatally flawed because socialist economics fails to recognise that the economy is dynamic. You can’t change one input to the system without others shifting in response – both when macro market forces and micro human behaviour are involved.

The flaw comes when they crunch the numbers. Leunig’s Guardian piece claims to calculate that the benefits cap would leave people living on 62p a day. The most crucial element of his workings is that a 4-bedroom house in Tolworth costs £400 a week. That’s true right now, but it wouldn’t be the case once a cap has been brought in.

The truth is that some of the main beneficiaries of overly high benefits are private landlords. They may not get payments from the DWP direct, but they reap the cash anyway through inflated rents, secure in the knowledge that every time they put the price up, benefits levels are raised to pay them. This is a racket, exploiting the foolishness of officials in pumping more and more money out and the absence of taxpayer power to rein in this behaviour.

Tim Leunig is right that if rents were fixed as they are now then his hypothetical family would pay£400 a week. But rents aren’t fixed, they are fluid. If you remove a large amount of cash from the system then prices will fall. By arguing for the system to remain as it currently is, rather than accept a cap, this supposed “progressive” is effectively fighting the corner of benefit-farming landlords.

There are knock-on benefits to removing the artificial inflation in rents, too. If renting property out becomes less profitable, the desire and the financial means to buy-to-let will be reduced, helping to address the shortage of affordable housing that is so often highlighted as a problem.

This is why we can expect IDS to be intensely relaxed about this fight gaining so much publicity. When it comes down to it, he has public opinion and solid economics on his side.

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Categories: Economics, Opinion, Politics, Public spending

14 Responses

  1. LabourNutter:

    I think you missed one point.
    If the government always pays and rents rise accordingly then working families with fixed salaries will lose out a second time because they will have to pay out higher rents as well as more in taxes.

    23.01.2012 14:45 Reply

    • Andy Nicholas:

      Most working families live ln mortgaged properties thse days and get little or no help from the benefits system.

      24.01.2012 23:30 Reply

      • maria m:

        home owners claim benefits too if they find themselves on a low income: mortgage interest support. child benefit, child tax credits, working tax credits ( savings, investments, property value, are not taken into consideration with tax credits)

        23.02.2012 11:06 Reply

  2. johnd2008:

    My wife and I have worked and contributed all our lives and are now retired. We can only dream of an income of £26000 pa. It so happens that my tax allowance is exactly the same sum as my State pension , meaning that I have to pay tax on my occupational pension. It cannot be right that a pensioner is expected to support those who have never worked and who have no intention of supporting themselves and their families.

    23.01.2012 15:32 Reply

    • maria m:

      The amount of people on benefits that have ‘never worked’ (actually not relevant with ‘work schemes’ in place) is extremely low and those would more then likely have a disabled member or carer in the household. 80% of claimants are only in the system (JSA) for 6 months at the most.

      23.02.2012 11:18 Reply

  3. Comment:

    Your post ignores that if these expensive rents go down, then the cost of less expensive rents will go up as there is more demand.

    23.01.2012 15:34 Reply

    • Number 7:

      Is your second name Balls or Milliband?

      23.01.2012 22:01 Reply

    • Hugh:

      Everyone is missing the point. Brown like any other Ponzi scheme operator encouraged rents to rise through these state subsidies. He benefitted through the Capital Gains Tax and Stamp Duty paid by Buy to Letters, and by the extra tax gathered as people borrowed against their over inflated houses and spent, spent spent. But now the whole scheme is unwinding, and someone has to pay.!

      26.01.2012 18:41 Reply

  4. lola:

    Quite. It is abundantly clear that inflated benefits feed straight back into inflated prices of every necessity, but especially housing. The knock is that rents are consequently so inflated that working people cannot afford them or have to claim benefits to be able to do so, and so the circle starts around again.

    23.01.2012 15:37 Reply

  5. Richard G.:

    Excuse the German. Wohnungsgeld is capped in Germany….result lower rents all round.

    “Für einen Einpersonenhaushalt gilt dabei eine Obergrenze von höchstens 370 Euro. Bei Haushalten, die aus mehreren Familienmitglieder bestehen, lauten die Obergrenzen bei einem Zweipersonenhaushalt maximal 455 Euro, bei einem Dreipersonenhaushalt 540 Euro und bei einem Vierpersonenhaushalt maximal 630 Euro.

    For a 4 person household, the max is 630 Euros a month..about 530 pounds.

    Housing benefit on the British model leads to massive market distortions and social injustice.

    23.01.2012 18:34 Reply

  6. Lords’ vote on benefit cap: reactions :: politicalhook:

    […] Wallace, in his article The benefits cap debate – a win for Ministers, and an economic fail for critics, said: “The truth is that some of the main beneficiaries of overly high benefits are private […]

    24.01.2012 04:01 Reply

  7. John Moss:

    Leunig also gets his figures wrong. The current LHA rate for Tolworth is £392.31per week, but elsewhere in Kingston and in the neighbouring Borough, the rate is £300pw. The left seem to think it is a crime to ask somebody who rents a home at taxpayers’ expense, to move somewhere cheaper, I don’t.

    24.01.2012 07:41 Reply

  8. maria m:

    Im afraid your report is wrong in several areas. Since Local Housing Allowance for privately rented property was introduced benefits are not raised to cover increasing rents, it is set at an average of the bottom 30% of rent in each region. If your rent increases to the level above this you would be expected to find another property within the bottom 30%, most of us working or not (lets not forget that us working people claim housing allowance too) choose to stay and meet the shortfall if we are entitled to LHA. Some landlords do reap in the benefit (LHA) straight from DWP (well the council actually) in the form of private sector leasing.

    23.02.2012 11:13 Reply

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