Leading Article: Who benefits from this costly system?

HOUSING benefit is one of the areas of public expenditure due to come under special scrutiny as the Government wields its spending knife. The cost of this benefit has been rising steadily, reaching pounds 5.6bn in 1991-2 and expected to rise to about pounds 7bn in the current fiscal year. In housing association accommodation, 76 per cent of tenants are now eligible, compared with only 56 per cent three years ago. High unemployment is partly to blame, but there is no reason to expect that an upturn in the economy will solve the problem. Unemployment will not drop sharply in the near future and structural defects in the system of housing benefit will continue to push up the bill unless remedied.

Outright fraud is the smaller part of the problem, although it generates a lot of publicity. Stories of foreigners receiving up to pounds 2,000 a month from the British taxpayer to live in expensive London flats arouse justified indignation. Local councils have little incentive to crack down because most of the funding comes from central government.

Indeed, one London council is reported to have rented flats from private landlords and then sub-let them at much higher rents to people on benefit, pocketing some of the difference. Scrutiny is now being tightened, and the Government claims to have saved pounds 558m last year by uncovering fraudulent claims for a range of benefits.

More important, because more costly, is the way the present system discourages recipients of benefits from working by sharply reducing their benefits when they find a job, making it scarcely worthwhile for many of them to work at all. At the same time, property developers grow fat by letting accommodation to people on benefit, receiving the rent directly from the local authority. The system is, therefore, doubly costly: it eats up direct benefits and keeps recipients off the labour market, where they would otherwise contribute to the economy and pay taxes.

Solutions are not obvious. If people on benefit were allowed to keep their earnings it would be costly for the Government and unfair on those living only on their earnings. The Commons select committee on the environment has recommended graduating the reduction of benefit more generously, to increase the incentive to work. This would initially be more costly and for that reason may not recommend itself to the Treasury. But it would bring quick social benefits by encouraging more recipients to seek jobs, while in the long run it should save money by reducing the number of people claiming benefit.

Other remedies should also be looked at. It is absurd, for instance, that local authorities have so little incentive to prevent fraud or to scrutinise legitimate claimants more closely to prevent the system being exploited. When there is so much evidence of apparently legal profits being made by property developers at the expense of the taxpayer, it is time to re-examine the underlying principles of the system. The Labour Party is doing so in the course of its wider review of the welfare state. The Government need not wait for the results before generating imaginative thinking of its own.