The fairest way to fix the benefits system

We don't need to tell people to "work harder" – building more homes and raising the minimum wage will tackle our housing and wage problems head on

The shadow work and pensions secretary Rachel Reeves says the benefits system is broken (Susannah Ireland/The Independent)

The benefits bill keeps on rising - but a dividing line between the two main parties on how to bring it down is finally emerging.

Rachel Reeves’ speech today draws on House of Commons Library analysis showing that the number of working people claiming housing benefit is set to double between 2010 and 2019. Wages are simply not keeping up with rental prices: a job is no longer a guarantee that one can keep a roof over one’s head.

In response to the spiralling housing benefit bill, the government has opted for a "supply-side" approach – cutting off the supply of housing benefit by making eligibility for it stricter, and the amount claimants receive less generous.

The flaws with such a policy are obvious. People have less money to pay their rent, but their rents remain the same. Yes, it reduces the housing benefit bill – but the price is increased hardship, arrears, evictions, homelessness. Even the Government’s favoured justification for such measures – it will encourage people into work – doesn’t ring true in the face of the explosion in claimants who are already working.

Are we honestly going to suggest that every working person claiming housing benefit just needs to "work more" or "work harder"?

Most importantly, the amount one can salami-slice off the benefits bill in this way is limited. In order to make substantial, sustained reductions to the housing benefit spending – which at 14 per cent of the benefits bill is, pensions aside, our biggest single area of benefit spending – is to look at the root causes of demand for housing benefit, rather than fiddling with supply.

When considering it like this, it’s clear we have two problems: massively inflated rents, as a result of our failure to build barely half of the housing we need to meet population growth year on year; and wages which do not meet the cost of living.

So it’s a huge relief to see that Labour seems to have struck upon this demand-side response to welfare spending. Reeves’s promise to build more homes and raise the National Minimum Wage tackle both the housing and wage problems head on, reducing housing benefit "upstream" (i.e. preventing people from needing it) rather than cutting off supply once people do.

Of course, the big question is how one might go about these bold but indisputably necessary moves.

In my recent Demos Quarterly essay I suggest a range of options. To build more houses, I moot setting a target for local authorities to use at least 75 per cent of lending allocation to build new homes. This can be followed up with with compulsory selling off of unused NHS and MOD land and taking a long, hard look at green belt – to separate the ‘green and pleasant land’ from the inaccessible bits of waste ground – in order to protect the former and free up the owners of the latter to sell to housing developers.

For wages, I point out that the minimum wage would have to increase from £6.31 to a whopping £8.21 an hour to ensure full-time workers (without children) earn £16,000 a year before tax and free themselves of needing state support.

Rather than a blanket increase, a lighter touch approach would be to give employers more ‘skin in the game’ when it came to the wages they paid. For example, companies paying anything between the national minimum wage and the Living Wage, with high internal wage ratios (where executives earn, say, 100 times their frontline workers), should be made to contribute towards the government’s tax credit bill in the form of a flat-rate, per person levy.

This would be in recognition of the fact that it is the government who is essentially under-writing these low wages and it might be set at half the average in-work benefit payment, reflecting a split in responsibility between the government and employer. Employers could either increase their workers’ wages to reduce their levy, or pay up.

These moves might seem controversial, unpopular in some quarters – but could they be any more unpopular than the Bedroom Tax, or other ‘supply side’ welfare policies the current government has introduced?

At least the benefit of these ‘demand side’ measures is that they would work in the long-term and generate a range of economic stimuli on the side. If Labour badged its welfare reform agenda in the run up to the election not as ‘tough on benefits’, but as ‘tough on the causes of benefits’ – it would be on to a real winner. Reeves’ speech today could be the first step.

Claudia Wood is Chief Executive of the think-tank Demos