Shadow of doom

It doesn’t look as though work and pensions secretary Iain Duncan Smith is going to make many new friends in the housing sector. Already a rather controversial figure for his views on housing and poverty, he is about to embark on a programme of welfare reform which could cast a long shadow over social landlords’ incomes.

Mr Duncan Smith is so determined to take up the mantle of the grim reaper to the fast-growing benefits bill that he has threatened to quit if his plans for welfare reform are not successful.

‘My purpose in life here is to improve the quality of life of the worst-off in society,’ he said in a newspaper interview recently. ‘If somebody tells me that I have to do something different then I won’t be here any longer.’

He is determined to make his mark on the benefits system, although the shape of that mark is not yet clear. There are only vague commitments to change so far, but the sector is already starting to brace itself for the spectre of cuts to its income. As the Work and Pensions’ department’s second largest bill after the state pension, the £17 billion housing benefit will inevitably come in for attention from ministers eager to axe public spending.

Over the coming weeks, ministers and civil servants will be calculating how they can both shave the bill and implement Mr Duncan Smith’s plans to get more claimants back into work. These aims are not necessarily complementary, but it is clear that housing benefit is going to change.

So what might the politicians be planning?

Previous efforts
This isn’t the first time politicians have tried to grapple with housing benefit. The previous administration first started consulting on reforms to housing benefit in 2002. It also launched a green paper on welfare in 2006. A joint department of Work and Pensions and Treasury review was announced in the Budget in March 2008. In recent years, the housing benefit bill has soared, and is set to reach £20 billion this year.

In some areas such as Westminster, councils are spending 50 per cent more on housing benefit than they did two years ago.

A consultation started by Mr Duncan Smith’s predecessor Yvette Cooper focused primarily on the private rented sector. This is the area where spending is growing at the fastest rate and is relatively easy to reform, says Sam Lister, policy and practice officer at the Chartered Institute of Housing. Short-term reforms to the way local housing allowance is calculated could save up to £250 million a year by removing the top
5 to 10 per cent of rents in each area.

But that’s not to say that social landlords can sit back and enjoy no change at all to the benefit that just under three-quarters of their tenants receive. Last Thursday, Mr Duncan Smith announced he was committed to reforming the whole benefits system to make it more attractive to go back to work and to reduce the complexity for claimants. The coalition agreement promised a tougher attitude towards handing out benefits for those who refuse to take up work.

Already there are indications of the direction he intends to take in reforming housing benefit. His special adviser is his former colleague Philippa Stroud, who is the director of the Centre for Social Justice where Mr Duncan Smith was founder.

He has drawn his plans to simplify the welfare system largely from proposals made by the centre-right think tank.

The CSJ wants to streamline the complex benefits system into two main benefits: a universal work credit and a universal life credit. Housing benefit would join other benefits such as disability living allowance in the universal life credit. A universal work credit would subsume incapacity benefit, jobseeker’s allowance and income support.

He has also hinted that reforms started by former Labour work and pensions secretaries James Purnell and John Hutton were steps in the right direction, particularly sanctions for claimants who turn down jobs.

Mr Purnell has since joined the New Labour think tank Demos, whose report on welfare reform in April suggested extending the system of direct payments of benefits to tenants currently used in the private rented sector to social tenants as well.

Social landlords say they don’t have the luxury of waiting for the proposals to be fleshed out. Many have already started testing the effects of a drop in housing benefit income on their business plans.

Long-term fears
Geraldine Howley, chief executive of Bradford housing association Incommunities says her organisation has started working out what the reforms could mean for the way it operates.

‘We suspect housing benefit could be capped, so what we are doing at the moment is some sensitivity analysis of our business plan,’ she says.

‘We’re looking at how things may change for us, but it is the impact on our customers of a lower rental income that would be the main
concern.’

Ms Howley is not just concerned that tenants may struggle to pay their rent; she is also worried about the effect that a lower income from housing benefit would have on Incommunities’ own activities. This is a primary fear for social landlords as housing benefit forms 65 per cent of their rental income.

Mike Donaldson, director of residential services at London and Quadrant, worries that this drop would risk slowing programmes of work. ‘That would put stress on our revenue streams,’ he says. ‘The first thing to be affected would be our development programme.’

The housing association began to build 2,000 homes in 2009/2010 and completed 1,753.

There is also a niggling worry at the back of landlords’ minds that any long-term cuts could have an even more serious effect. In February, a report from the Tenant Services Authority warned that any attempt to reduce housing benefit payments could seriously threaten social landlords’ viability.

The report, The impact of the credit crunch on housing associations, says: ‘[Housing benefit] provides social landlords with a solid, low-risk foundation for their activities.

‘Reductions in housing benefit could undermine this as the balance would presumably have to be paid by tenants, increasing the risk of bad debt.’

A drop in the amount of housing benefit paid to tenants would not immediately damage housing associations, says Mr Donaldson.

‘We would be able to cushion the blow using our reserves for a while,’ he adds. ‘But if you have got reductions for a few years, then that cushion would be very depleted.’

Talk of direct payments to tenants makes landlords very nervous as well. ‘There would be an issue in terms of rent arrears,’ says Ms Howley. ‘Lenders would be worried about what that would mean.’

Concerns for tenants
Tenants are also worried. Tenants and Residents Organisations of England believes the only way the sector could maintain affordability in the face of cuts would be to drop rents to reflect the drop in benefits, something that other senior figures in the sector echo.

Cora Carter, TAROE chair, says: ‘What is clear that there are a number of connected factors that need to be taken into account.

‘This includes balancing the need to tackle public spending against maintaining affordability for tenants, ensuring continued landlord viability and considering wider factors related to financial inclusion, sustainability, and fuel poverty.’

The National Housing Federation, which represents housing associations, is alive to the serious impact reforms could have on their members’ businesses.

Assistant director Helen Williams says the NHF wants to hold discussions with the government about ‘the most effective use of housing benefit to help people on low incomes’. In the meantime, she says they are keen to make progress on easing tenants back into work.

The details may be sketchy but major reform of housing benefit is almost certainly on the horizon; Mr Duncan Smith has pinned his job on it.

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