The rise in real housing costs over the twenty years prior to the current government has made rent
allowances and rebates under the Housing Benefit (HB) system one of the most expensive of all
government welfare programmes - more than £11 billion a year for more than four million
households.
Yet the way the system is designed to subsidise the housing costs of poor people is a major factor
behind the UK's poverty trap, seriously undermining work incentives. This is because HB is
means-tested for recipients in work via a 65% taper - that is, for every extra £1 of income earned,
Housing Benefit receipts fall by 65p.
The government has postponed any major reform of the HB system but new research by Professor
Ian Walker and Paul Bingley, published in the latest issue of the Economic Journal, suggests
that changing the taper - or changing rent levels directly through a 'bricks and mortar' subsidy -
would have dramatic effects on work incentives.
Walker and Bingley estimate a statistical model to explain how many hours individuals work and
find that keeping gross rents constant and varying the taper from 0% (where HB would be a lump
sum payment) through 65% (the actual level) to 100% (where HB would cease to exist) would
result in a dramatic increase in the work participation rate. The rate would rise from around 30%
(when the taper is 0) through 50% (at the actual level of taper) up to 66% (when there is no HB
system) and hours of work for those in work would rise from an average of 10 per week through
12 to 15.
HB is a delicate balancing act that attempts to overcome the adverse work incentives associated
with the way in which the HB pays up to 100% of the housing costs of those in receipt of Income
Support. It does this by providing a corresponding in-work transfer programme that subsidises the
housing costs of those who are poor but in work.
The 65% taper on HB has been ameliorated by the Working Families Tax Credit, which increases
the cash assistance to poor households (with children) so that they are now less likely to qualify
for housing subsidies. Thus, since April 2000, one has to have higher housing costs or be deeper in
poverty to be eligible for HB. Indeed, part of the extra expenditure on WFTC is being offset
through reduced HB expenditure.
The results of this study indicate that despite the complexity of HB, the treatment of housing costs
by the welfare system has dramatic effects on work incentives. If work is the answer to poverty
policy, as the government believes, it now has the evidence on which to base policy to reform the
treatment of housing costs in the welfare system.
Notes for Editors: 'Rents and Work: The Implications of Housing Costs and Housing Benefits for
Work Incentives in the UK' by Paul Bingley and Ian Walker is published in the May 2001
Economic Journal. Bingley is at Aarhus University, Denmark; Walker is Professor of Economics
at Warwick University.
For Further Information: contact Ian Walker on 02476-523054 (email:
i.walker@warwick.ac.uk); RES Media Consultant Romesh Vaitilingam on 0117-983-9770 or
07768-661095 (email: romesh@compuserve.com); or RES Media Assistant Niall Flynn on 020-
7878-2919 (email: nflynn@cepr.org).