Treasury rather than tenants to gain from social rent cut, says IFS

5 Nov 15

Cuts to social housing rents announced by Chancellor George Osborne will be of little or no benefit to most of the 3.9 million tenants in the sector, but will save the Treasury around £1.7bn, an analysis has found.

An examination of the changes by the Institute for Fiscal Studies found that the 1% cut a year for the next four years announced in the Summer Budget found most of those renting their home from councils or housing associations received Housing Benefit to cover all or part of their rent.

Therefore, entitlement to Housing Benefit will typically be reduced pound-for-pound as their rent falls, resulting in a saving to the Treasury.

Tenants’ disposable incomes will only increase by an average of £179, today’s report concluded, with those that do gain likely to be around the middle of the income distribution.
However, the reduction in Housing Benefit will strengthen tenants’ work incentives as they have less means-tested support to lose by entering work or increasing their earnings.

Social landlords overall – whether either housing associations and local authorities – will lose an estimated £2.3bn a year from the rent cut.

Compared to previous policy to increase rents by the Consumer Prices Index measure of inflation plus 1%, this means that social rents are expected to be 12% lower than they would otherwise have been by 2019/20.

Senior research economist Robert Joyce said the policy displayed “a worrying lack of consistency.”
“The government had committed to increasing social rents for ten years; but after just one of those ten years, it announced that rents will instead fall for the next four years,” he added.

“This instability could damage the ability of social landlords to plan and finance new house-building.”
The Social Rent Policy report analysed the impact of the Budget’s “Pay to Stay” announcement, which will require social housing tenants with incomes above £30,000, or £40,000 in London, to pay market-rate rents from April 2017.

This is expected to impact around 250,000 households per year, or about 7% of social renting households in England.

The IFS called for the government to think clearly about how the policy will be implemented. If rents jump straight up to market levels when income reaches the threshold, there would a “cliff edge”, where people earning £1 more could pay thousands of pounds more rent. That would create perverse incentives, meaning a pay rise could trigger a rent increase averaging about £3,000 a year.

Increasing rents more gradually as incomes rise above the threshold would be more sensible, but this will involve trade-offs over revenue, incentives and targeting of support, its report added.

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