The true cost of the cap

The benefit cap statistics released last week provoked predictable reactions – finding 33,000 households were subject to the cap led the Daily Mail to label them the ‘families who had hit the benefits jackpot’. It was implied those affected by the cap were somehow gaming the system, and were now being ‘caught out’ by the new rule.

But in addition to the £26,000 benchmark being essentially arbitrary (based on average household income rather than an objective line between ‘deserving’ claimants and ‘scroungers’), its portrayal is also extremely misleading, as a cursory glance at the statistics will show.

It is no coincidence that half of those affected by the cap are larger families (up to four children) and that half live in London. These families are not receiving thousands in child benefits and living the high life. In fact, they won’t ever see the majority of the benefits they are ‘claiming’ – it goes straight to their landlords’ bank accounts to pay their rent, in the form of housing benefit.

Obviously, bigger families have bigger homes, so pay higher rents, and so claim more housing benefit. Those living in London – where rents are the highest in the UK by a fair margin – also claim more housing benefit to cover their rent. Contrary to the Mail’s description of these families having £500 per week ‘take home income’, their income from benefits is likely to be a fraction of the total amount they claim on paper.

And this is why the triumphant narrative regarding ‘fairness’ to describe the cap is so damaging. When a person’s benefit income is capped, this actually means their housing benefit is reduced to bring down the total claimed to below the £26,000 mark. But crucially, their rent remains the same: they will inevitably face a shortfall in the money they need to pay that rent. To avoid eviction, the shortfall will need to be found from the much smaller ‘non-rent’ proportion of benefits income: the bit needed for heating, or food, or clothes.

Let’s illustrate with a typical family hitting the ‘benefits jackpot’ of £26,000 a year, or £500 per week. Mrs Smith is single, unemployed and has five kids (36 per cent of those affected by the cap have five or more children, 59 per cent are single parents).

The Smiths live in Enfield (not the most expensive borough in London, but where the largest number of people affected by the cap live). Mrs Smith would normally get around £71.70 in JSA and £73.90 in child benefit per week, or £7,571 per year. That’s pretty modest, and far below the £26,000 cap limit. Where might the rest come from?

Well, according to Foxtons, the average rent of a four-bed property in Enfield (we’ll assume four of the five kids share a room, as required by housing benefit eligibility guidance) is £496 per week.

However, housing benefit does not cover average rental rates, but is pinned to the bottom third of local housing markets – so in Enfield, the most Mrs Smith could claim is £370 in housing benefit per week for their four-bed property, regardless of how much their rent actually was. But that still amounts to over £19,240 per year. Add the £7,571 of non-housing benefits the family receives, and that amounts to £26,811. The Smiths have hit the jackpot!

Of course, of this £515 per week ‘jackpot’, the Smiths’ landlord automatically gets handed £370 (or 71 per cent) of it for rent, leaving the Smiths with a far more modest £145 to live on. When the cap is applied, the family loses £15 per week in housing benefit. So they have £355 per week to pay their rent, which, remember, may well be more than £370 per week and already be eating into the £145 they have left to live on.

To make up the shortfall in rent, Mrs Smith will have to take £15 from her weekly budget, leaving her with £130 to feed and clothe her and her five children, not to mention heat that expensive house. It’s obvious that the real jackpot winner is her landlord, who – despite of the cap – will take the same amount of money from the state, regardless of how much money Mrs Smith has left to live on.

Some MPs have demanded the cap be lowered to £20,000 a year, because the policy is so ‘popular’ with the public. Would the public be so supportive if they knew that this drastically lower cap would mean the Smiths weren’t actually living on £20,000 per year, but – after over £19,000 per year demanded in rent – would have a shocking £760 per year to live on? The Smiths, living in the bottom third of the rental market in Enfield and sharing bedrooms, have limited options to reduce their rent.

Yes, the benefits cap is a scandal – but not the one being reported. The real scandal is how rents are so high in some parts of the UK that landlords can regularly demand nearly £20,000 a year in housing benefit, and the cap means their tenants are being punished for it.