Not so much a poverty problem but a benefits problem

The context

This is a true story. Some years ago a Polish builder working in the UK suffered an accident at work in which his right hand was severely injured. Although he is perfectly capable of working with his left hand, prospective employers took one look at his injury and determined that he was unfit for work. Deprived of his ability to make a living, the man quickly burned through his savings, and came to rely on the £72 per week provided by Employment and Support Allowance (ESA). Not surprisingly he was unable to continue to pay for his accommodation and was soon reduced to living in a shed.

Last week, our builder showed up at a job centre in a well-to-do part of southern England to try and get some help with his circumstances. After having told his story, the first question he was asked by the officer dealing with his case was whether he had any health issues. Assuming that the question referred to supplementary issues other than his hand, he replied that he suffered from anaemia. The officer was about to press the enter button on the keyboard to finalise the data entry when another official who was observing the interview reminded them that the man had a serious hand injury.

It was then explained to our builder that he was eligible for housing benefit. Wonderful – some help at last. Except that in the Kafkaesque system employed in the UK, the recipient first has to find a place to live and only then are they entitled to support. Due to the shortage of social housing, those seeking somewhere to live are forced to rely on the private rental sector. Assuming you can find someone willing to rent their property, the landlord will ask for a deposit of 2-3 months’ rent. If you are living in a shed and surviving on £72 per week, the chances of saving up around £1,000 for a deposit are slim to none. To recap, this is a skilled workman who paid his taxes whilst he was working and by an unfortunate sequence of circumstances found himself living in a shed, in the middle of winter in what prides itself as being a rich civilised country. Furthermore, he cannot claim his housing benefit because he has nowhere to live.

I must admit to being shocked by this story and it is an eye-opener to realise that people are living in such circumstances in a so-called rich economy in the 21^st century. It would be easy at this point to say that Jeremy Corbyn was right after all, and that the electorate has mistakenly given a mandate to a Conservative government which is putting increased pressure on the poor. But I am not sure that this is the whole story.

The problem 

On a long-term basis, the evidence suggests that there was a sharp rise in relative poverty, but it occurred in the second half of the 1980s, during the second and third term Thatcher governments (as measured on an income basis, see p18 of this House of Commons Briefing Paper). It has been exacerbated by a sharp rise in housing costs, which means that income after housing costs has not recovered to the same extent as before-housing cost income where relative poverty levels have fallen moderately since the 1990s. The Social Metrics Commission, an independent group of experts which is working to understand and measure poverty in the UK, reckons that the proportion of people living in poverty (which takes into account factors such as income and housing costs) has fallen slightly since the middle of the last decade (chart) with a larger decline for pensioners than for other groups. Overall numbers have gone up, of course, but more slowly than growth in the total population.

I do not wish to suggest that poverty is not a problem, because it clearly is for a lot of people. But a far bigger problem appears to be issues with the benefit system itself. In summer 2018 the National Audit Office released a damning report on the rollout of Universal Credit (UC). UC was introduced in 2012 and was intended to simplify the benefits system by combining six benefits into one and to raise work incentives by promoting a system of benefit-tapering as people moved into work rather than ending state support altogether. However, as the NAO pointed out, the system did not initially work as intended and underwent several changes – one of the biggest was the 2015 decision by George Osborne to reduce the UC budget, which limited its effectiveness. 

One of the biggest failings of the system compared to previous benefits was the decision to pay out in arrears. Claimants do not receive any payment until five weeks after their first claim whereas under the previous system they were eligible for payment straight away. The well-documented rise in food bank use appears to be highly correlated with the introduction of UC, with the Trussell Trust reporting a 67% increase in the distribution of food parcels over the past five years, as claimants simply do not have sufficient funds to buy food. 

A (partial) solution 

I have no political axe to grind, not being a member of any political party. But as an economist with an interest in social justice issues, the first thing I would recommend to the new Conservative government is to take action to resolve the flaws in the UC system. This would go a long way towards helping those voters in those areas who “loaned” their votes to the Tories in exchange for “getting Brexit done.” An obvious fix would be to reduce the waiting time before benefits are paid out. Another possibility would be to reduce the UC taper rate. At present, the taper rate is set at 63% which means that for every £1 earned above the Work Allowance, benefit is reduced by 63p. According to the HMRC tax ready-reckoner, each £100 increase in Working Tax Credit costs the Exchequer £260 million versus a cost of £605 million for each £100 rise in the personal tax allowance, so altering the taper rate is a cheaper way of helping the truly low paid.

If the Conservative Party is serious about renewing its contract with the electorate, small fixes such as this could go much further than the big headline-grabbing proposals espoused by the main parties during their election campaigns. They will be cheaper too.