Housing Benefit Reform Economics of Under Occupancy Penalty and Lords Amendment

1. Housing Benefit ReformEconomics of Under Occupancy Penalty and Lords Amendment Andy Park Head of Housing and Regeneration Analysis, Scottish Government 6 March, 2012

2. Background • Scottish Government have undertaken significant analysis of most aspects of housing benefit reform. • Focus today on one aspect – the under-occupancy penalty or “bedroom tax”. • Deliberate focus on Economic impacts rather than social. • http://www.scotland.gov.uk/Topics/Built-Environment/Housing/supply-demand/chma/Benefitchanges

3. Under Occupancy Clause • As part of the Welfare Reform Bill the UK Government proposes to reduce the housing benefit paid to certain tenants in the Social Rented Sector. • Tenants deemed to be under-occupying by one bedroom will have their housing benefit (or housing element under Universal Credit) reduced by 14%. • Where they are deemed to be under-occupying by 2 or more bedrooms the reduction will be 25%.

4. The Lords Amendment • During the Lords’ amendments stage, the under-occupancy measure was significantly amended to apply either to people deemed to be under-occupying by 2 or more bedrooms, or to those under-occupying by 1 bedroom and where no suitable alterative accommodation is available.

5. SG analysis[1] has previously indicated that 75,800 households would be impacted by the 1 bed under occupancy change with an average loss of £9 per week and 19,600 households under occupying by 2 or more bedrooms would be impacted by £16, assuming that they remained in their existing property. • This equates to around £1m per week or over £50m per year. • [1] http://www.scotland.gov.uk/Topics/Built-Environment/Housing/supply-demand/chma/Benefitchanges

6. If the intention is to bring about a “fairer” use of the existing social stock by reducing under occupancy, then if the measure is successful, then it will be revenue neutral in terms of DWP’s budget. • Analysis suggests that in Scotland that whilst around 95,000 social houses are under-occupied, as detailed above, only around 26,000 are over-occupied. This would still leave 69,000 households without an appropriate alternative in the social sector.

7. The clause in practice Scenario 1 – “Success” – All households move to an appropriate property. Analysis suggests that in Scotland that whilst around 95,000 social houses are under-occupied, as detailed above, only around 26,000 are over-occupied. Assuming that all those over-occupying wished to move, and for the moment ignoring the organisational practicalities, this would still leave 69,000 households without an appropriate alternative in the social sector and facing a move to the PRS. Scenario 1 – “Success” – All households move to an appropriate property. Under Occupying Household Scenario 2 – “Failure?” – All households absorb the losses. The policy has no impact on under-occupancy, no-one moves and the reduction in benefit levels is absorbed by households. Whilst also unlikely in totality, it may be the choice of some households. Scenario 2 – “Failure?” – All households absorb the losses. Scenario 3 – “Realism” – Households build up rent arrears. Scenario 3b – Households are evicted Scenario 3a – Landlords absorb losses

8. The clause in practice Scenario 1 – “Success” – All households move to an appropriate property. Under Occupying Household Scenario 2 – “Failure?” – All households absorb the losses. Scenario 3 – “Realism” – Households build up rent arrears. Scenario 3b – Households are evicted Scenario 3a – Landlords absorb losses

9. An sidestep into Economic Theory • HMT Green Book • Government Economists “bible” • Covers how to appraise (and evaluate) policy changes • Of interest is Annex 5 – Distributional Impacts

10. Accounting for distributional effects • The basic method is to weight the impact depending on the average income group targeted by a scheme. • The essence of the method is that the value gained from an additional £1’s worth of consumption is much higher for lower income groups than for higher income groups. • There has been significant empirical research into the extent of this effect. • Results in a formula that can be used, in conjunction with an income distribution, to calculate income weights that reflect this difference in value.

11. Here comes the Economics bit • Pearce and Ulph (1995) estimate a range for the elasticity of marginal utility of 0.7 to 1.5 with a value of 1 being defensible. • A value of 1 gives a utility function of the form: U = log C • Thus marginal utility of consumption is 1/C • If consumption doubles, marginal utility falls to half of previous value.

12. Suppose scheme A impacts those in income group 1 by £100 and scheme B impacts those in income group 20 by £100. • The distributionally weighted impact of scheme A is £100 x 3.9 = £390 which comprises an impact of £100 and a distributional effect of (£390-£100)= £290 • The distributionally weighted impact of scheme B is £100 x 0.38 = £38 which comprises an impact of £100 and a distributional effect of (£38-£100)= -£62

13. The clause in practice Scenario 1 – “Success” – All households move to an appropriate property. Under Occupying Household Scenario 2 – “Failure?” – All households absorb the losses. Scenario 3 – “Realism” – Households build up rent arrears. Scenario 3b – Households are evicted Scenario 3a – Landlords absorb losses

14. Scenario 1 - Welfare • No direct cost savings to the welfare budget • However, those occupying the vacated stock will be smaller households and so will vacate larger PRS properties than those taken up by those vacating the social stock. • Assuming all new entrants to the social sector are in receipt of benefit, then there will be savings to the welfare budget. • The average difference in LHA between bedroom sizes (a flat average not taking into account stock composition) is around £23 across Scotland. • Possible generation of annual savings of (23x52x69,000) £82.5m to welfare budgets.

15. Scenario 1 – Other costs • Relet costs • The costs of a relet are estimated by SCSH at between £1600 and £5350 depending on the nature of repairs etc. undertaken. This is consistent with other estimates of relet costs. Taking the lower level, over 95,000 households this would represent £152m. • Admin costs • It is clearly difficult to estimate admin costs for such a scenario. Admin costs for tenancy breakdown are estimated at between £500 and £2200 depending on circumstance but in this scenario moves are voluntary but will require co-ordination. As a bare minimum 10 hours across a range of officers would not seem unreasonable..Rounding to £150 on average results in total costs of around £14.25m. • Void costs • The average void in Scotland costs around £280 in lost rent. If in this scenario, void times were 2/3 rds of the average, this would result in total costs of £17.7m

16. Scenario 1 - Total • In summary, this scenario has the potential to make annual savings of over £80m to the Welfare Budget in Scotland but would generate costs for the housing sector, under conservative assumptions, of around £184m. On a per affected household basis this equates to an annual welfare saving of £842 and an initial cost of £1936.

17. Scenario 2 • This scenario is more straightforward. There is a saving of £50m per year in the Welfare Budget and £50m is removed from the Scottish economy. This loss, being faced by those on low incomes, will have a negative distributional effect. • The average social household is in the seventh income vigintile which has a weight of 1.35. • Income weighted amount = £50m x 1.35 = £67.5m • Negative distribution effect = £67.5m - £50m = £17.5m • This scenario has an annual saving to the welfare budget of £50m but has a negative annual impact of £67.5m. On a per affected household basis this equates to an average annual welfare saving of £526 and an average cost to the Scottish economy of £710.

18. Scenario 3a • Under Scenario 3a where landlords absorb loses, the impact on the Scottish economy is equal to the impact under Scenario 2 excluding the distributional impact. • In other words the costs to the Scottish economy are equal to the savings to the UKG. • In reality this scenario would cause significant difficulties for the social housing sector. Whilst LA landlords may be able to reallocate resources or simply reduce maintenance, there are potentially greater implications for RSLs who may face financial difficulties including potential breach of banking covenants. These are not quantified at this point. • In summary, this scenario has an annual saving to the welfare budget of £50m but imposes annual costs of £50m. • On a per affected household basis this equates to an average annual welfare saving of £526 and an average annual cost to the Scottish economy of £526.

19. Scenario 3b • SCSH estimate the cost of tenancy failure as between £13,000 and £20,000 per single household excluding support costs but including likely levels of temporary accommodation required. • This excludes lost rent in terms of arrears (but covers voids) and is for single person households only. Whilst costs are likely to be higher for larger households in order to generate robust estimates, a value of half the lowest level is used. • This means that Scenario 3b adds £6500 per household or £618m as a one-off cost to the costs in Scenario 3a.

20. Scenario 3b - Homelessness • In addition, there are likely to be significant costs that will arise in Scotland because of Scotland’s specific (and different) homeless legislation. • This stems from the issue that there are not sufficient 1 bedroom lets available in the social rented sector to meet the needs of all single homeless applicants, particularly after the 2012 commitment (to remove the distinction of priority need) is met.  • While not all homeless are on housing benefit, SCORE data on homeless lets by housing associations suggests over half are.  • The discharge of homeless duty in the private rented sector involves a complicated process requiring the consent of the applicant and this results in very few homeless applicants taking up lets in the PRS under these arrangements - likely that there will be significant numbers of single homeless applicants in temporary accommodation awaiting a 1 bed social let.   • This will lead to additional benefit costs and administrative costs. This will be an ongoing problem rather than simply a problem at the time the change is introduced.   • Of course, if councils continue to be successful in prevention, the scale of the mis-match between need and supply, and hence the cost, will reduce.  • These costs have not been included in the analysis in this paper. This is a problem and a cost in Scotland but not in England.

21. Summary of Scenarios

22. But what will be the actual impact? • In reality is likely that the outcome will be a mixture of the 4 scenarios – some people will move voluntarily, some will absorb the loss, some will run up arrears and social landlord will deal with this in different ways.

23. Combo 1 – 4 way-split

24. Combo 2 – Best Case • All social households reallocate to balance occupancy as far as is physically possible given the stock (26,000 households follow Scenario 1). Of rest, half the losses are absorbed by tenants (Scenario 2) and half by landlords (Scenario 3a) and there are a small number (1000) of evictions (Scenario 3b).

25. Combo 2 – “Best” Case

26. Combo 3 – “Likely case?” • Outcome 3 could be considered a “Likely case”. • Around 8000 households relocate according to Scenario 1. Of the rest half absorb the losses and half run up arrears and ¼ of those running up arrears are evicted.

27. Combo 3 – “Likely case?”

28. Combo 4 – Worst case • Outcome 4 might be thought of as a “worst case”. • In this case small numbers relocate (4000), and small numbers absorb losses (4000). Of remainder half are evicted.

29. Combo 4 – Worst case

30. The Lords Amendment • The amendment suggests removing the penalty for those under-occupying by 1 bedroom where there is no “suitable alternative accommodation available”. • Exempting all 1 bed households and repeating the likely case above on the 2 bed-room under occupiers only (Around 8000 households relocated. Of the rest half absorb the losses, half run up arrears and ¼ of these are evicted) would result in an annual saving to the UKG of £12.8m, an annual loss in Scotland of £7.2m and a one-off impact of £-24.9m in Scotland. • Overall there would be a positive NPV of £81.4m.

31. Lords Amendment • It is more difficult to calculate the “suitable alternative accommodation available” criteria but as detailed above whilst around 95,000 social houses are under-occupied around 26,000 are over-occupied. • This could be construed as 26,000 suitable alternative accommodation places available. • Extending the case above to add an additional 26,000 1 bed under occupiers would result in the following:

32. Lords Amendment

33. Lords Amendment • Whilst savings to the UK gov are approximately halved (by around £25m), and there are still annual negative impacts in Scotland of £23m and a one off cost of £46m this is much lower than without the amendment in place. • More importantly, the overall negative impact of the measure (an NPV of -£115m) in Outcome 3, the likely case, is converted into a positive benefit (an NPV of £15.4).

34. Implemented vs. Amendment Amendment Original (and implemented)

35. Conclusion • Paper (in a very short timeframe) demonstrated that the Lords Amendment to the Clause had a (small) positive NPV whilst the unamended clause has a (large) negative one. • Used in a letter from Mr. Brown (Scottish Housing Minister) to Lord Freud (UK Welfare Minister). • Reply received after Amendment had been rejected.