To cap it all…

Issue 222 (June 2011)

David Simmons sets out a critical analysis of the proposal to introduce a ‘benefit cap’ from April 2013.

Introduction

The government’s Spending Review in October 2010 included a commitment to introduce a ‘benefit cap’, designed to limit maximum ‘out-of-work’ benefit payments to the level of average earnings. The cap has now been legislated for in the Welfare Reform Bill 2011 and is due to take effect from April 2013. This article examines how the cap is expected to operate, and critically analyses the government’s assertion that it is a fair and necessary measure.

How the cap will operate

The cap will limit the total amount of benefit that can be paid to a non-working household to an amount determined by the Secretary of State with reference to average weekly earnings net of tax and national insurance deductions.1 The government estimates that the cap will be set at £500 a week for couple and lone parent households and £350 for single adult households when it comes into force in April 2013. The figures will be reviewed annually.2

Benefits included in the cap

Most benefit payments will be included in the cap including income support, jobseeker’s allowance (JSA), employment support allowance, housing benefit (HB), council tax benefit (CTB), child benefit, child tax credit (CTC), industrial injuries benefits and carer’s allowance, but one-off benefits, such as social fund loans and non-cash benefits like free school lunches, will not count. The cap will apply to universal credit when it is introduced.3

Exclusions
  • The cap will not apply to claimants over pension age or to war widows, and pension credit and state retirement pension will be disregarded.
  • Households with a person (including a child) who is receiving disability living allowance (DLA) or constant attendance allowance will be exempt from the cap.
  • The cap will only apply to non-working households. It is not entirely clear what level of work will trigger exemption from the cap. It appears that prior to the introduction of universal credit, only households receiving working tax credit will be exempt, effectively setting a threshold of work of at least 16 hours a week. The position following the introduction of universal credit is less clear, but the DWP has indicated that it does not expect exemption to be based on the number of hours worked. This raises the possibility of an earnings threshold.4
Application

In practice, prior to the introduction of universal credit, the cap will be applied by local authorities reducing HB payments (it is unclear what will happen if a claimant is receiving mortgage interest housing costs rather than HB). Claimants on universal credit will see their benefit capped by the DWP.5 There will be no right of appeal against a decision to apply the cap.6

Impact and rationale

The government estimates that the cap is likely to affect around 50,000 households, who will lose an average of £93 a week. It will disproportionately affect larger families (80 per cent will be families with three or more children), single parent and ethnic minority households (around 60 per cent and 30 per cent respectively of those affected) and people living in higher rental areas, who are all more likely to be receiving higher levels of benefit.7

The government concedes that:

‘The cap is likely to affect where different family types will be able to live. Housing benefit may no longer cover housing costs and some households may go into rent arrears… Some households are likely to present as homeless, and may as a result need to move into more expensive temporary accommodation, at a cost to the local authority’.8

It nevertheless asserts that the cap is fair and necessary. In particular, it argues that the cap will make the welfare system fairer to taxpayers and working families and will act as a work incentive for workless families. It will ‘….send out a clear signal that the benefit system is not intended to keep people in long-term worklessness, while receiving more in benefit than average household earnings’.9

Further, in the context of the budget deficit:

‘The state can no longer afford to pay families on out-of-work benefits large amounts in benefit each week, sometimes in excess of the average wage earned by working families…The benefit cap will sit alongside other Spending Review measures which will ensure that the benefit system is fair and affordable…’10

The message about fairness has dominated the political debate about the benefit cap. The Chancellor’s Spending Review statement described the cap as ‘tough but fair’, while his speech to the Conservative Party conference in September 2010 said:

‘The welfare state needs to reflect the British sense of fair play…Unless they have disabilities to cope with, no family should get more from living on benefits that the average family gets from going out to work’.

The message about ‘fairness’ is an easy one to ‘sell’, especially when comparisons are drawn between ‘workless’ families receiving large weekly benefit payments, and ‘hard-working’ families receiving average earnings. We do not doubt that the benefit cap would be widely supported in a public opinion poll and by large sections of the media and most MPs. Opposition parties are also loathe to criticise the cap because of its perceived popularity. A more in-depth analysis, however, casts doubt on the fairness, necessity and workability of the cap.

Critique

There is no evidential basis that the cap will act as a work incentive, or even achieve significant fiscal savings (given the costs of homelessness and family break up which could result, as well as the cost of administering the cap). It is also important to view the cap within the context of all the other cuts to out-of-work benefits announced in the 2010 Budget and Spending Review (see Bulletins 217 and 219), particularly the cap on HB payments, which call into the question the necessity for a further overall cap.

More fundamentally, the government’s assessment of the effects of the cap (see above) fails to address a number of issues which we believe seriously undermine the assumption that the measure is fair, necessary and workable.

Flawed comparison

The comparison which underlies the cap, between families receiving out-of-work benefits and average net earnings, fails to take into account the fact that many families in receipt of average earnings are also entitled to benefits which can considerably boost their income levels. A couple with weekly net earnings of £500, for example, with four children and rent and council tax liabilities of £400 a week, could be receiving an additional £400 in HB and CTB, child benefit and tax credits. The notion of claimants ‘receiving’ large weekly payments of benefit is also questionable, where a large proportion of the payments are HB which has to be paid directly over to landlords. In this context, it is also arguable that inflated private sector rents, which claimants have no control over, are a major cause of high weekly benefit payments and that it is unfair to penalise claimants for this.

Regional variations

The cap takes no account of regional variations in earnings and housing costs, disproportionately affecting those who live in high rental areas (eg, large swathes of London). The government concedes that the cap will cause serious difficulties for claimants with high housing costs. In fact, taking the example of a couple with four children who are receiving JSA, child benefit, CTC and CTB of around £400 a week, the imposition of the cap would leave them with only £100 for housing costs. The local housing allowance for a four-bedroom property exceeds this figure in virtually all areas of the UK.

Family size

The cap disproportionately affects larger families – more than 90 per cent of households affected will have children, 80 per cent will have three or more children, and 40 per cent will have five or more children. In fact, the larger the family (and the greater the financial need), the more the cap will ‘bite’. This does not sit easily with the notion of ‘fairness’. The cap will also act as a disincentive for couples to live together, rather than maintain separate households. Two lone parent households, each with two children, for example, would be unaffected by the cap, whereas if they decided to live together in larger accommodation, they may well lose a significant amount of money because of the cap.

Vulnerable children

Many vulnerable children are living with relatives and friends rather than their parents for a variety of reasons including parental drug or alcohol misuse, bereavement, serious illness, imprisonment and child abuse and neglect. The cap could act as a disincentive for these kind of ‘informal’ caring arrangements, where additional benefit paid in respect of the children cold trigger its application. This could result in more children being taken into local authority care. More generally, the financial difficulties caused by the cap, which are likely to result in more housing transience and family break up, will create and adversely affect vulnerable children and families.

Vulnerable adults

Many vulnerable adults live in temporary and supported accommodation, including various forms of hostels, refuges, and rehabilitation units. Such accommodation is invariably more expensive than ‘mainstream’ accommodation and it seems particularly unfair that such people are consequently more likely to be affected by the benefit cap. Some women affected by domestic violence may not be able to afford to move into a refuge. Homeless families may be forced to move into temporary accommodation which is a long way from their former home (and wider family, school, doctor etc) to obtain affordable accommodation.

Leaving work

The cap could have a devastating effect on people forced to give up employment for various reasons including redundancy, sickness or disability, or inadequate childcare. The cap would kick in immediately, causing enormous difficulties and hardship for people who are already facing very difficult circumstances. Thousands of people are being made redundant and may need time on benefits before they find another job. People forced to give up work because of sickness or disability could suddenly find themselves plunged into a financial crisis because of the application of the cap. Although anyone entitled to DLA is exempt from the cap, and this exemption is likely to apply to recipients of the new personal independence payment (PIP) (see fact sheet in this Bulletin), there will be a six-month qualifying period before PIP is payable and far fewer disabled people are likely to qualify for PIP than DLA.

Work incentives

There is no evidence that a fixed benefit cap is an effective means of encouraging or forcing claimants to take up employment. We believe that other measures, including more generous tapers, earnings disregards and assistance with childcare provision and costs, are better targeted methods of enhancing work incentives. The cap could also act as a disincentive to take up part-time or low-paid employment which is below the earnings (or hours) threshold which triggers removal of the cap.

Complexity

Administering the cap will add more complexity to the system, directly contradicting the intention of simplifying the system through universal credit. In particular, the criteria for determining whether a person is ‘in work’ for the purposes of applying the cap will create a threshold which some people in low-paid part-time employment may frequently cross, resulting in wild fluctuations in their benefit entitlement and complex ‘better-off’ calculations.

Conclusion

We do not believe that a fixed benefit cap, regardless of circumstances including family size, local rent levels, and the reasons why a claimant is not working, is either fair, or an acceptable way to achieve fiscal savings. There is no evidence that it will enhance work incentives. It will undoubtedly cause considerable hardship and increase child poverty. We believe that it is fundamentally wrong and unfair that families should not receive the minimum levels of financial support laid down by Parliament to meet their living expenses and housing costs just because they have more children, live in an expensive rental area or supported accommodation, or have fallen out of work through no fault of their own.

 


Please be aware that welfare rights law and guidance change frequently. Therefore older Bulletin articles may be out of date. Use keywords or the search function to find more recent material on this topic.

  • 1. Clause 93 Welfare Reform Bill 2011(WRB)
  • 2. Para 3 Household Benefit Cap Equality Impact Assessment March 2011 (DWP) (EIA); Clause 94(4) WRB
  • 3. Paras 1 and 4 EIA; Clause 93(4) and (11) WRB
  • 4. Para 4 EIA; WRB Regulation Making Powers document (DWP)
  • 5. Para 2 EIA
  • 6. Clause 94(5) WRB
  • 7. Impact Assessment for Household Benefit Cap 16/2/11 (DWP) (IA)
  • 8. IA (Summary: Analysis and Evidence)
  • 9. Spending Review Statement October 2010
  • 10. Para 5 EIA