Thoughts on a benefits cap - The Institute for Fiscal Studies.

This week, debate over the Government's Welfare Reform Bill has returned to the House of Commons. An element that has grabbed a lot of attention is the proposed benefit cap for working-age households (excluding those claiming Disability Living Allowance or Working Tax Credit), which will be set at £350 per week for childless single people and £500 per week for other households. This is now expected to affect about 67,000 households in Great Britain when implemented in 2013-14, reducing their benefit entitlement by an average of £83 per week and cutting the benefits bill by about £290 million in that year. To put this in context, other planned cuts to welfare spending amount to about £18 billion per year by the end of this parliament, and will affect millions of working-age benefit recipients.

How could households be in receipt of more than £500 per week in benefits? Put simply, they must have either a large number of children or high housing costs (or both). A couple with four children and no private income would be entitled to about £373 per week in Jobseeker's Allowance, Child Benefit and Child Tax Credit. If they paid rent of £127 per week or more (plausible rent levels for those who rent privately or are in social housing in London), a Housing Benefit claim to cover this would result in total benefit income of at least £500 per week. A smaller family could also be affected by the cap if they live in a particularly high-rent area such as London and consequently claim a large amount of Housing Benefit (for an example, a 3-bedroom household who rent privately can claim up to £340 per week in Housing Benefit to cover their rent). The Government's Impact Assessment estimates that 69% of households that will be affected have at least three children, and 54% live in Greater London (where rents are high).

So what will this policy achieve, apart from reducing state benefit payments to about 67,000 households with lots of children and/or high housing costs? The Government has said that it hopes there will be two forms of behavioural response: families may move to cheaper accommodation to reduce their housing costs, and/or take up paid work because their out-of-work benefit entitlement will have been reduced. A third possible form of behavioural response is in fertility rates, since the cap will effectively reduce state financial support for some large families (see here for previous IFS research on fertility and financial incentives). If this were the main intended impact, though, one would expect to see the policy affecting only new claimants of child-contingent benefits. A fourth possible behavioural impact is for fewer people to cohabit, since the benefits cap is to apply at the household level, and hence living apart could split benefits across households and mean that neither is subject to a cap. This 'couple penalty' is presumably something the Government would not be keen on, as it has said that it wishes to reduce couple penalties in the tax and benefit system.

Crucially, is a benefits cap the best approach to take to deal with benefit payments that the Government deems excessive? If it thinks that the benefit system is giving some families a level of entitlement that is too high, it must believe that some benefit rates are inappropriately high. The best-targeted response would surely be to change those benefit rates. In this particular case, the logic underlying the Government's belief that no family should receive more than £500 per week in benefits would point towards cutting the amount families receive for having large numbers of children and/or reducing the value of housing costs against which people can claim Housing Benefit.

The apparent simplicity of instead just placing a cap on total benefit receipt might look appealing, and may well be politically expedient. But it seems incoherent for a Government to set a system of benefits which it evidently thinks gives some families excessive entitlements, and to then attempt to 'right this wrong' with a cap. If starting from scratch, this is surely not the approach one should want to take. And very shortly the Government will be starting from scratch - its planned Universal Credit is to replace almost all of the existing system of means-tested benefits and tax credits for those of working age. If it has a view on the maximum reasonable level of benefit entitlement for these people, then it should design Universal Credit (and in particular, the child and housing cost additions within it) to reflect that view. It is not clear what is gained from instead layering a cap on top of a system that is designed to allow higher payments.

The approach of tweaking particular benefit rates, rather than imposing a post hoc cap on total benefit receipt, would also force the Government to think carefully about (and be explicit about) the features of the current benefits system that it considers inappropriate. Apart from improving the quality of its solution to the perceived problem, this may also improve the quality of wider debate about the issue. After all, it would make it crystal clear what precisely the debate is about.