Policy challenges around welfare reform

[This is the text to accompany my presentation to open the South West Observatory seminar “Welfare reform: challenges, impacts and evidence”, 13/11/12]

Where to start?

Politicians are prone to hyperbole. The most minor modification to a relatively peripheral policy is portrayed as a groundbreaking initiative. However, in the case of welfare reform a hugely ambitious agenda is being pursued in the name of making work pay. Nothing like it has been attempted for decades. The challenges are therefore enormous. There is a huge amount at stake. The well-being of the most vulnerable members of society depends on its successful delivery.

We should begin by distinguishing politics from policy, although there is not such a bright dividing line between the two as is sometimes assumed.

The Coalition’s political agenda invites analysis. Indeed, I’ve blogged about aspects of it a number of times in the past. From an academic perspective several topics cry out for interrogation:

  • The discourse around welfare reform
  • The – how should we put it – “innovative” use of statistics in support of the case for reform
  • The models of society underpinning the reforms: the understandings of household structures; the presumed or asserted behaviours of benefit recipients, landlords and employers; the presumed incentive effects of the welfare system on the housing market and the labour market.

At an event a few months ago I was speaking to a Whitehall civil servant – not from DWP I hasten to add – and I asked – with what might be described as faux innocence – how the evidence-based policy agenda was going. The response was that we were beyond the era of evidence-based policy. We are now in the era of “commitment-based policy”. I enquired whether that was a polite euphemism for ideologically-driven policy. The civil servant diplomatically declined to be drawn on the matter.

But it is clear that the welfare reform agenda flows from belief rather than evidence. Iain Duncan-Smith and Lord Freud believe they know the right way to go. It doesn’t really matter what the evidence says.

That isn’t to say that evidence isn’t being collected. Clearly there is plenty of piloting going on and data being collected. But those exercises are not to determine whether the policy is a good idea or whether it will go ahead, it is to examine what sort of effects welfare reform will have and to try to mitigate some of the more damaging consequences. The aim is to understand the positive or perverse effects on the labour market and housing market and the impact on levels of poverty.

We are already seeing the emergence of a range of circumstantial evidence. Increasing numbers of homeless households, increasing numbers living in temporary accommodation, increasing overcrowding, and higher rates of new LHA claims in outer rather than inner London would all seem to be predictable consequences of taking financial resources away from already poor people.

However, we are not really here today to talk about the politics of the issue but the policy. I will, nonetheless, mention just two issues that may play an important role in the politics of welfare reform in the near future, which may in turn fold back in to policy.

The first is the arrival of the council tax benefit changes in April 2013. I don’t think these changes have really been grasped yet. Some of the poorest households will be asked to contribute a significant chunk of their limited resources where previously they have fallen outside of the system. It is possible that this will turn out to be the Coalition’s mini-Poll Tax.

Perhaps more importantly, the arrival under Universal Credit of conditionality to in-work benefits could potentially change the terms of the debate. As I have blogged before, households who are doing their best, taking on part-time work because there is no full-time work available – the strivers not the skivers – will suddenly find themselves subject to the full panoply of disciplinary techniques associated with the benefit system. Suddenly they are reconstituted as part of the problem. This could turn rather nasty politically.

When we turn to policy challenges it can be helpful to think in terms of three levels: principles, design and implementation.

Principles

I don’t know anyone who thinks the tangle of benefits that currently operate is optimal. So the case for some sort of reform is not hard to make.

The principle of Universal Credit is one that is generally positively received, although it should be recognised that introducing Universal Credit while the economy is in good health is a rather different – and easier – proposition than introducing it in a period of fiscal retrenchment.

Similarly, the idea of improving work incentives and removing dysfunctionally large effective marginal tax rates is not, as far as I am aware, seriously contested.

The issue of an overall benefit cap is a little more contentious. There are those who retain the belief that benefits should be proportionate to need. There should therefore be no theoretical upper limit on what an individual household might receive. However, there would appear to be a political consensus in Westminster that a cap is appropriate. The only area of dispute is whether a national cap is too blunt an instrument and whether regional caps would be more appropriate.

Design

The challenges start to come more clearly in to view as we move to consider how the Government has gone about implementing those broad principles. How is the system going to be calibrated – for example in terms of the tapers applied as earned income increases – and how will it operate in practice?

A key question is whether policy design has taken sufficient account of the context in which the new system will be implemented. One illustration of the way that it appears not to have done so is in relation to underoccupation. Social tenants below retirement age will be subject to a “bedroom tax” if they are deemed to be underoccupying their property. The options they face are to make up the shortfall in the rent from their own pocket or to trade down to a smaller, cheaper property more aligned to their current needs. Alternatively they could take in a lodger. The logic of the policy – couched in terms of making best use of social housing – is that trading down is the preferred option from a central policy perspective.Housing organisations have repeatedly pointed out that there are not sufficient smaller properties available to make the trading down option realistic for most of the households subject to the bedroom tax. Yet this does not appear to have significantly altered the trajectory of policy.

Four characteristics of the coming reforms have attracted particular note:

  • The Universal Credit system will be predominantly online (“Digital by default”). This approach rests on benefit recipients holding bank accounts. It relies on them being sufficiently ICT literate, or indeed literate in any language. And it requires that they have regular access to appropriate networked hardware. All these conditions are not fulfilled at present and there is a risk that they won’t be much better fulfilled by the time Universal Credit arrives.
  • Payments will be made to the benefit recipient directly. This is a particular concern in relation to housing benefit, which has typically gone directly to the landlord. Switching to direct payment inevitably increases the risk associated with landlords’ primary income stream. The question is by how much.
  • Larger payments will be made monthly to households rather than smaller payments at more frequent intervals. This raises issues about budgeting skills and support for budgeting. This is being explored in the Direct Payments pilots that are currently under way. The Government is clearly not against providing support for budgeting, but it appears to be against providing it in the forms that have been conventionally used. DWP are looking to work with financial services providers to see if appropriate new products can be developed (as I discussed critically here).
  • Payments to a single designated individual within each households, typically the household head. There are reasons why benefits are paid to different members of households at the moment. The move to a single payment rests on the assumption that each household is able to sort out the most appropriate payee strategy for themselves. This is based on a particularly optimistic view of intra-household relations that certainly won’t apply to all households receiving benefit (as I noted here).

Implementation

We can distinguish three phases of implementation that raise different issues: transitional, short term and longer term. We can also think about implementation from the perspective of households and public and voluntary sector organisations.

Transitional

The dominant issue here is readiness. Are organisations and households ready for the changes that are rapidly approaching. At a minimum, is information getting out the right people? And is it being taken on board?

Perhaps the elephant in the room on readiness is the question of whether the new ICT needed to deliver Universal Credit will be up and running in time. The DWP’s public pronouncements state that the project is on track. However, there are persistent reports in the newspapers that the project is in trouble. Most recently, on the weekend the Independent suggested that it was likely that the launch will be delayed. My experience of these things – across various sectors – is that public pronouncements on progress will continue to be positive right up to the point at which it is finally conceded that a project’s timetable will have to slip substantially or a project collapses completely.

Short term

In the short term, following the introduction of the new system, looming large are the issues of households’ budgeting capacity and the trade-offs that they are going to have to make in the face of declining real income. Is rent going to be traded off against new obligations to pay council tax, for example? How many households are going to stay in situ and poverty deepen? How will households who want to trade down react when they find that they are unable to do so because there is a lack of suitable stock?

Press releases from the DWP are making positive noises about the findings from the Direct Payments pilots, in terms of households’ ability to cope with the new regime. The reports in the housing press are rather different. The limited information from pilot landlords emerging through channels other than the DWP suggests a large increase in arrears and landlords putting a lot of effort into arrears management.

So for organisations there is a pressing question of how well they know their tenants, who will be affected by the welfare reforms and who will be affected most severely. Are the arrears and debt management services in place going to be sufficiently robust to deal with this new world? Are there new types of support that could be put in place that would have a significant positive impact on tenant well-being and/or income recovery? And how can this support be achieved given public organisations are themselves facing cuts in funding?

Are there new types of collaboration with other RPs or private landlords that could be put in place to make trading down a more realistic option for more tenants?

And, given that many tenants are going to face a reduction in income post-housing costs, is this going to spill over into negative impacts on other services the organisation provides on the basis of user charging?

Longer term

In the longer term organisations are going to face a host of questions. For some there may be questions of financial viability. There are almost certainly going to be questions of creditworthiness. Financial institutions have been willing to lend large volumes to RPs on the basis that they have a guaranteed income stream underpinned by housing benefit. That is no longer quite so clearly the case. Risk premia are no doubt being recalculated accordingly.

What are the implications of welfare reform for who gets allocated social housing? If arrears turn out to be a significant problem then one can envisage some RPs feeling driven to try to change the profile of their tenants towards those who are more reliable payers. This is happening in the private rented sector as landlords seek to let more properties to those who are not in receipt of the LHA. It isn’t entirely implausible that RPs move in a similar direction in order to shore up their business plans.

If so then that could place strains on inter-organisational relations. Local authorities have legal obligations to fulfil under allocations and homelessness legislation and they look to RPs to assist in meeting those obligations. Yet, RPs are under a legal duty to co-operate only to the extent that is reasonable. In the face of the prospect of being expected to house large numbers of tenants who cannot pay, at what point does co-operation become unreasonable?

On the other hand, the signals coming from CLG are that the Government is looking to break the link between statutory homelessness and allocation of a social housing tenancy. Instead they are encouraging local authorities to direct homeless households to the private rented sector. Given that the risk of rent arrears may be greater among this group, it may be that the two agendas intersect in a way that mitigates tensions between landlords. But not necessarily to the advantage of those households in the most vulnerable position.

From the perspective of households, the overall benefit cap is going to be a key issue in the longer term. In the short term it doesn’t affect a large number of households. However, if the cap is fixed in nominal terms and benefits are uprated, even if only by CPI, then over time the cap will tighten and more people will be affected. If, on the other hand, benefits are not uprated for inflation for a number of years, as part of the policy of fiscal retrenchment, then the cap will not affect more people. However, the real value of benefits will be progressively eroded. Under either scenario the incidence of poverty increases.

In concluding his recent overview of the way welfare policy is likely to evolve up to 2020 Jonathan Bradshaw noted: “This review paints a very bleak picture. But there is a risk it is not bleak enough”. He describes aspects of welfare reform as “nightmarish”. I don’t think that is hyperbole. The current system of multiple benefits may not be streamlined but if there is a problem with one benefit then at least households can fall back on the other benefits in the short term. Bringing all the key benefits together under Universal Credit may well result in a more streamlined system. If it works. But if the system malfunctions, for whatever reason, then it is perfectly possible that many households will be left without any money. Or they’ll inadvertently find that they’ve been overpaid as a consequence of some error in information provided or flaw in calculation and face unmanageable demands for repayment. Either way the term “nightmarish” would seem entirely appropriate.

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  1. Sadly from my perspective (working in a frontline independent advice agency) ‘nightmarish’ is too gentle a word. One of the key things that has been missed in this debate is that the people most affected are already those who struggle the most to survive under the current system – the propaganda around benefit claimants and undeserving poor has been so successful that the fact that even prior to the cuts people on benefits overwhelmingly lived in debt and hand to mouth has been lost (cf – the numerous JRF reports on benefit rates and acceptable standards of living). We are taking the already poor and impoverishing them further. A disaster that wil arrive at some point soon, whether on schedule or not…

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