A note on the “Distributional Effect” of the House of Lords amendment of the
Welfare Reform Bill regarding under-occupancy of social sector stock.
Version 1.3b
Communities Analytical Services Jan 30 2012
Summary
SG analysts estimate that 95,000 households in the social rented sector in Scotland
could be affected by the measure to penalise under-occupancy of the social housing
stock, losing on average between £27 and £65 per month, (removing over £50
million a year directly from the Scottish Economy) if there is no reaction. However,
the actual impact will depend on the actions of households.
This paper examines 4 possible outcomes from the clause - people will move
voluntarily, some will absorb the loss, some will run up arrears and social landlords
will deal with this in different ways either allowing arrears or evicting.
The economic impact of each of these scenarios is calculated taking in a variety of
appropriate factors. Whilst the annual saving to the UK government ranges from
£50m to £80m, there are potential annual losses to the Scottish economy of
between £50 and £67.5m plus potential one-off costs of zero to £618m.
Annual Saving
to UKG
Annual Impact
in Scotland
One-off impact
in Scotland
Scenario 1 –
Voluntary moves
Total
Per/HH
(£m)
(£)
82.5
842
Scenario 2 –
Households absorb
Total
Per/HH
(£m)
(£)
50
526
Scenario 3aLandlords absorb
Total
Per/HH
(£m)
(£)
50
526
Scenario 3b Evictions
Total
Per/HH
(£m)
(£)
50
526
0
0
-67.5
-710
-50
-526
-50
-526
-184
-1936
0
0
0
0
-618
-6500
This does not take into account any economic multiplier effects and does not
account for either specific implications of Scottish Homeless legislation nor impacts
on the financial stability of social landlords. Even more strongly, it does not consider
the wider social impacts that may arise from large numbers of households being
pressured into moving.
In practice, the result will be a mixture of all 4 outcomes. If a sensible mix (around
8000 households relocated and of the rest half absorb the losses, half run up arrears
and ¼ of these are evicted) is examined the result is an annual saving to the UKG of
£53m, an annual impact in Scotland of -£54.4m and a one-off negative impact in
Scotland of £87m. This represents a loss to the UK as a whole over 30 years (the Net
Present Value of the measure) of -£112.5m from the application of the measure in
Scotland.
A realistic implementation of the Lords amendment would reduce the savings to the
UKG to £26.5m but reduce the costs to Scotland to £23m annually with an initial
impact of around £46m. The overall effect would be a benefit to the UK, from the
measure in Scotland, of £15.4m over 30 years.
In summary, analysis shows that the main clause represents poor value for money
with a negative overall impact at the UK level from the measure in Scotland. The
Lords amendment, whilst still imposing costs on Scotland and causing practical and
policy issues, does result in a positive overall outcome at the UK level from the
Scottish component of the change, and is clearly superior on economic grounds.
Background
As part of the Welfare Reform Bill the UK Government proposes to reduce the
housing benefit paid to certain tenants in the Social Rented Sector. Tenants deemed
to be under-occupying by one bedroom will have their housing benefit (or housing
element under Universal Credit) reduced by 14%. Where they are deemed to be
under-occupying by 2 or more bedrooms the reduction will be 25%. SG analysts
estimate that 95,000 households in the social rented sector in Scotland could be
affected losing on average between £27 and £65 per month, (removing over £50
million a year from the Scottish Economy).
During the Lords’ amendments stage, the under-occupancy measure was
significantly amended to apply either to people deemed to be under-occupying by 2
or more bedrooms, or to those under-occupying by 1 bedroom and where no
suitable alterative accommodation is available. The UK Government has so far
indicated that they will overturn this amendment (which they claim would otherwise
reduce the savings associated with the Bill by £300 million a year).
This paper considers possible outcome of the measure and amendment and
undertakes an economic assessment of each. Where appropriate it applies the
methodology described in Annex D of HMT’s Green Book: a guide to appraisal and
evaluation in government to include distributional effects. This methodology is
discussed in Annex A.
Discussion
SG analysis1 has previously indicated that 75,800 households would be impacted by
the 1 bed under occupancy change with an average loss of £9 per week and 19,600
households under occupying by 2 or more bedrooms would be impacted by £16,
assuming that they remained in their existing property. This equates to around £1m
per week or over £50m per year.
The first, and key, point to note about the measure is that if the intention is to bring
about a “fairer” use of the existing social stock by reducing under occupancy, then if
the measure is successful, then it will be revenue neutral in terms of DWP’s budget.
In other words, if the measure removes under-occupancy from the social sector it
will not save any welfare money as there will be no under-occupancy to penalise.
This would seem to be somewhat at odds with the UK Government statement that
the proposed amendment would have cost implications.
The second point to note is what would be the practicalities of a successful policy.
Analysis suggests that in Scotland that whilst around 95,000 social houses are underoccupied, as detailed above, only around 26,000 are over-occupied. Assuming that
all those over-occupying wished to move, and for the moment ignoring the
organisational practicalities, this would still leave 69,000 households without an
appropriate alternative in the social sector. These households would need to move
into the private sector and this would free up social stock. However, there are costs
associated with such moves, even if undertaken freely and willingly and these are
considered below.
The social costs of the policy in terms of the potential impact of the displacement of
large numbers of households from settled accommodation on health, crime and
education outcomes may be significant but no attempt is made to quantify them in
this paper.
Scenario 1 is considered to be this notion of a “successful policy”. It is fairly clear that
this outcome is somewhat unlikely, so Scenario 2 is defined as the exact opposite –
the policy has no impact on under-occupancy, no-one moves and the reduction in
benefit levels is absorbed by households. Whilst also unlikely in totality, it may be
the choice of some households.
The two versions of Scenario 3 consider a more likely outcome – households build up
arrears and this impacts on the finances of social landlords. In Scenario 3a, landlords
absorb these losses and in Scenario 3b, the arrears result in tenancy loss and the
associated costs of homelessness applications and temporary accommodation.
Clearly, in reality, the outcome is likely to be a mixture of all 4 scenarios and the
analysis considers the impact of various potential combinations.
1
http://www.scotland.gov.uk/Topics/Built-Environment/Housing/supply-demand/chma/Benefitchanges
Impact of Scenarios
This section draws on research by the Scottish Council for Single Homeless that
examines the costs of tenancy failure2. The paper provides useful information on
relet and administration costs which would be relevant across the sector although
the focus of the paper is on single homeless and so will understate temporary
accommodation costs for larger households.
Scenario 1
As discussed above, in this scenario there are no direct cost savings to the welfare
budget in this scenario. However, those occupying the vacated stock will be smaller
households and so will vacate larger PRS properties than those taken up by those
vacating the social stock. Assuming that this is possible (clearly the composition of
the PRS will not immediately change) and that all new entrants to the social sector
are in receipt of benefit, then there will be savings to the welfare budget. The
average difference in LHA between bedroom sizes (a flat average not taking into
account stock composition) is around £23 across Scotland. This could generate
annual savings of (23x52x69,000) £82.5m to welfare budgets.
The following costs are incurred to the housing sector in Scotland:
Relet costs
The costs of a relet are estimated by SCSH at between £1600 and £5350 depending
on the nature of repairs etc. undertaken. This is consistent with other estimates of
relet costs. Taking the lower level, over 95,000 households this would represent
£152m.
Admin costs
It is clearly difficult to estimate admin costs for such a scenario. Admin costs for
tenancy breakdown are estimated at between £500 and £2200 depending on
circumstance but in this scenario moves are voluntary but will require co-ordination.
As a bare minimum 10 hours across a range of officers would not seem
unreasonable.
Manager
Supervisor
Advisor
Hourly cost
£20.50
£17.85
£11.17
Hours
1
2.5
6.5
Total
£20.50
£ 44.62
£ 72.61
£ 137.73
Rounding to £150 on average results in total costs of around £14.25m.
2
The Cost of Tenancy Failure 2011, Scottish Council for Single Homeless
Void costs
The average void in Scotland costs around £280 in lost rent. If in this scenario, void
times were 2/3 rds of the average, this would result in total costs of £17.7m
In summary, this scenario has the potential to make annual savings of over £80m to
the Welfare Budget in Scotland but would generate costs for the housing sector,
under conservative assumptions, of around £184m. On a per affected household
basis this equates to an annual welfare saving of £842 and an initial cost of £1936.
Scenario 2 – Loss borne by tenants
This scenario is more straightforward. There is a saving of £50m per year in the
Welfare Budget and £50m is removed from the Scottish economy. This loss, being
faced by those on low incomes, will have a negative distributional effect.
In addition there will be multiplier effects within the economy. The extent to which
these multiplier effects will be offset over time and whether similar effects should be
calculated on the budget saved are complex and controversial to determine. Whilst
the inclusion of multiplier effects would clearly increase the cost of the reform, they
are not included in this analysis.
It should be noted however, that significant concern has been expressed around the
impact of the reform on localised economies – benefit money tends to be spent
locally and there are concerns over the impact on retail and service businesses in
disadvantaged areas. The closure of such businesses would not only compound
disadvantage but would likely add to the welfare bill. However, the estimation of
such localised multiplier impacts is not attempted in this paper.
Negative distributional effect
This is calculated in line with HMT methodology as detailed in Annex A. The average
social household is in the seventh income vigintile which has a weight of 1.35.
Income weighted amount = £50m x 1.35 = £67.5m
Negative distribution effect = £67.5m - £50m = £17.5m
In summary this scenario has an annual saving to the welfare budget of £50m but
imposes annual costs of £67.5m. On a per affected household basis this equates to
an average annual welfare saving of £526 and an average cost to the Scottish
economy of £710.
Scenario 3 (a+b)
Under Scenario 3a where landlords absorb loses, the impact on the Scottish
economy is equal to the impact under Scenario 2 excluding the distributional impact.
In other words the costs to the Scottish economy are equal to the savings to the
UKG.
In reality this scenario would cause significant difficulties for the social housing
sector. Whilst LA landlords may be able to reallocate resources or simply reduce
maintenance, there are potentially greater implications for RSLs who may face
financial difficulties including potential breach of banking covenants. These are not
quantified at this point.
In summary, this scenario has an annual saving to the welfare budget of £50m but
imposes annual costs of £50m. On a per affected household basis this equates to an
average annual welfare saving of £526 and an average annual cost to the Scottish
economy of £526.
Scenario 3b is more complicated. SCSH estimate the cost of tenancy failure as
between £13,000 and £20,000 per single household excluding support costs but
including likely levels of temporary accommodation required. This excludes lost rent
in terms of arrears (but covers voids) and is for single person households only. Whilst
costs are likely to be higher for larger households in order to generate robust
estimates, a value of half the lowest level is used. This means that Scenario 3b adds
£6500 per household or £618m as a one-off cost to the costs in Scenario 3a.
In addition, there are likely to be significant costs that will arise in Scotland because
of Scotland’s specific (and different) homeless legislation. This stems from the issue
that there are not sufficient 1 bedroom lets available in the social rented sector to
meet the needs of all single homeless applicants, particularly after the 2012
commitment (to remove the distinction of priority need) is met. While not all
homeless are on housing benefit, SCORE data on homeless lets by housing
associations suggests over half are. The difficulty is that discharge of homeless duty
in the private rented sector involves a complicated process requiring the consent of
the applicant and this results in very few homeless applicants taking up lets in the
PRS under these arrangements.
If this pattern continues it is likely that there will be significant numbers of single
homeless applicants in temporary accommodation awaiting a 1 bed social let. This
will lead to additional benefit costs and administrative costs to local authorities. This
will be an ongoing problem rather than simply a problem at the time the change is
introduced. Of course, if councils continue to be successful in prevention, the scale
of the mis-match between need and supply, and hence the cost, will reduce. These
costs have not been included in the analysis in this paper. This is a problem and a
cost in Scotland but not in England where councils have no duty under homelessness
legislation to find settled accommodation for the majority of single homeless.
The impact of the 4 scenarios are summarised in the Table below:
Annual Saving
to UKG
Annual Impact
in Scotland
One-off impact
in Scotland
Scenario 1 –
Voluntary moves
Total
Per/HH
(£m)
(£)
82.5
842
Scenario 2 –
Households absorb
Total
Per/HH
(£m)
(£)
50
526
Scenario 3aLandlords absorb
Total Per/HH
(£m) (£)
50
526
Scenario 3b Evictions
Total Per/HH
(£m) (£)
50
526
0
0
-67.5
-710
-50
-526
-50
-526
-184
-1936
0
0
0
0
-618
-6500
Combination of Scenarios
In reality is likely that the outcome will be a mixture of the 4 scenarios – some
people will move voluntarily, some will absorb the loss, some will run up arrears and
social landlord will deal with this in different ways. In practice it s very difficult to
determine the split between these outcomes. A number of possibilities are
illustrated. In each case the annual saving to the UKG (of the Scottish impact only),
the annual impact on Scotland and any one-off costs are shown and a Net Present
Value is calculated using standard discounting techniques for a period of 30 years.
The Net Present Value, or NPV, calculates the overall impact of the changes in
Scotland. As such it represents the cost or benefit to the UK of the impact of the
reform in Scotland.
Outcome 1 is a simple four way split - In this case the 95,000 households are divided
evenly across the scenarios. Whilst clearly unrealistic, his scenario demonstrates the
relative impacts. There is an annual saving to the UKG of £57.5m but an annual
impact of £41.8m in Scotland and a one-off negative impact of £200m. The Net
Present Value (NPV) is £92.81 over a standard 30 year period.
£m
£150.0
£100.0
£50.0
£-
-£50.0
-£100.0
-£150.0
-£200.0
-£250.0
£m
Annual Saving to UKG
Annual Impact in Scotland
One-off impact in Scotland
NPV
£57.5
-£41.8
-£200.4
£92.81
Figure 1 - Impact of a simple split in actions
Outcome 2 might be considered as a “Best case”. All social households reallocate to
balance occupancy as far as is physically possible given the stock (26,000 households
follow Scenario 1). Of rest, half the losses are absorbed by tenants (Scenario 2) and
half by landlords (Scenario 3a) and there are a small number (1000) of evictions
(Scenario 3b).
£m
£250.0
£200.0
£150.0
£100.0
£50.0
£-
-£50.0
-£100.0
£m
Annual Saving to UKG
Annual Impact in Scotland
One-off impact in Scotland
NPV
£58.7
-£43.2
-£56.8
£234.76
Figure 2 - Impact of "best case" scenario
In this case there is a positive NPV but significant negative impacts in Scotland of
£50m per year and an initial cost to Scotland of an additional £50m. However, this
scenario is unlikely due to the virtual impossibilities in achieving such a high
proportion of scenario 1.
Outcome 3 could be considered a “Likely case”. Around 8000 households relocate
according to Scenario 1. Of the rest half absorb the losses and half run up arrears
and ¼ of those running up arrears are evicted.
£m
£80.0
£60.0
£40.0
£20.0
£-£20.0
-£40.0
-£60.0
-£80.0
-£100.0
-£120.0
-£140.0
£m
Annual Saving to UKG
Annual Impact in Scotland
One-off impact in Scotland
NPV
£53.0
-£54.4
-£87.0
-£112.50
Figure 3 - Impact of "likely" case
There is a significantly negative NPV and large annual and initial negative impacts in
Scotland.
Outcome 4 might be thought of as a “worst case”. In this case small numbers
relocate (4000), and small numbers absorb losses (4000). Of remainder half are
evicted.
There is a significantly negative NPV of almost £1/4 billion and large annual and
initial negative impacts in Scotland.
£m
£100.0
£50.0
£-
-£50.0
-£100.0
-£150.0
-£200.0
-£250.0
-£300.0
-£350.0
£m
Annual Saving to UKG
Annual Impact in Scotland
One-off impact in Scotland
NPV
£51.8
-£49.1
-£293.7
-£244.37
Figure 4 - Impact of "worst" case
Application of methodology to Lords Amendment.
The amendment suggests removing the penalty for those under-occupying by 1
bedroom where there is no “suitable alternative accommodation available”.
Exempting all 1 bed households and repeating the likely case above on the 2 bedroom under occupiers only (Around 8000 households relocated. Of the rest half
absorb the losses, half run up arrears and ¼ of these are evicted) would result in an
annual saving to the UKG of £12.8m, an annual loss in Scotland of £7.2m and a oneoff impact of £-24.9m in Scotland. Overall there would be a positive NPV of £81.4m.
£m
£100.0
£80.0
£60.0
£40.0
£20.0
£-
-£20.0
-£40.0
£m
Annual Saving to UKG
Annual Impact in Scotland
One-off impact in Scotland
NPV
£12.8
-£7.2
-£24.9
£81.43
Figure 5 - Impact of removing 1 bed under occupation from measure
It is more difficult to calculate the “suitable alternative accommodation available”
criteria but as detailed above whilst around 95,000 social houses are under-occupied
around 26,000 are over-occupied. This could be construed as 26,000 suitable
alternative accommodation places available. Extending the case above to add an
additional 26,000 1 bed under occupiers would result in the following:
£m
£40.0
£30.0
£20.0
£10.0
£-
-£10.0
-£20.0
-£30.0
-£40.0
-£50.0
£m
Annual Saving to UKG
Annual Impact in Scotland
One-off impact in Scotland
NPV
£26.5
-£23.2
-£46.0
£15.43
Figure 6 - Impact of Suitable available accommodation
Which is significantly better in NPV terms than outcome 3 above. Whilst savings to
the UK gov are approximately halved (by around £25m), and there are still annual
negative impacts in Scotland of £23m and a one off cost of £46m this is much lower
than without the amendment in place. More importantly, the overall negative
impact of the measure (an NPV of -£115m) in Outcome 3, the likely case, is
converted into a positive benefit (an NPV of £15.4).
Conclusions
The impact of the measure to penalise under-occupancy of social housing stock will
depend on the actions of households. This paper examines 4 possible outcomes from
the clause - people will move voluntarily, some will absorb the loss, some will run up
arrears and social landlords will deal with this in different ways either allowing
arrears or evicting.
The economic impact of each of these scenarios is calculated taking in a variety of
appropriate factors. Whilst the annual saving to the UK government ranges from
£50m to over £80m, there are potential annual losses to the Scottish economy of
between £50 and £67.5m plus potential one-off costs of zero to £618m.
In practice, the result will be a mixture of all 4 outcomes. If a sensible mix (around
8000 households relocated and of the rest half absorb the losses, half run up arrears
and ¼ of these are evicted) is examined the result is an annual saving to the UKG of
£53m, an annual impact in Scotland of -£87m and a one-off negative impact in
Scotland of £87m. This represents an NPV over 30 years of -£112.5m.
A realistic implementation of the Lords amendment would reduce the savings to the
UKG to £26.5m but reduce the costs to Scotland to £23m annually with an initial
impact of around £50m. The overall NPV would turn positive and be around £15m.
The analysis does not take into account factors such as the consequences of arrears
for social landlords and uses low estimates of costs. It is likely that the clause will
cause additional costs relating to the Scottish Government’s policy regarding
homelessness as it will become difficult to find suitable accommodation for single
homeless. Nor does the analysis attempt to quantify the wider social cost in terms
of educational attainment, crime and health that may be generated.
In summary, even with a cautious treatment of costs, the clause represents very
poor value for money (it has a large negative NPV). The introduction of the
amendment turns this around and whilst still imposing costs on Scotland, results in a
positive overall outcome at the UK level from the Scottish component of the change.
Annex A: “Distributional Effect” Methodology
The process used is complicated but is detailed in Annex 5 of HMT Green Book. The
basic method is to weight the impact depending on the average income group
targeted by a scheme.
The essence of the method is that the value gained from an additional £1’s worth of
consumption3 is much higher for lower income groups than for higher income
groups. There has been significant empirical research into the extent of this effect.
This is detailed in the Green Book but results in a formula that can be used, in
conjunction with an income distribution, to calculate income weights that reflect this
difference in value. These are shown in the diagram below which is based on the
average income distribution across Scotland and displayed in terms of income
vigintiles (20 income groups). There is some regional variation4.
Income weight by Income group
Income Weight
5
4
3
2
1
0
1
2
3
4
5
6
7
8
9 10 11 12 13 14 15 16 17 18 19
Income Group (Low to High)
A scheme that targets the median income (Income group 10) has a weight of 1 whilst
a scheme that targets the lowest income group (1 out of 20) has a weight of 3.9 and
a scheme that targets the highest income group has a weight of 0.38.
This means that schemes which reduce or increase the income (and hence the
consumption) of those at the lower end of the income distribution will have an
impact that is greater than the pure monetary value. There are two ways of
presenting this impact which are equivalent. The simplest way is to simply multiply
by the relevant income weight. This gives an overall distributionally weighted impact
and will always be the same sign as the overall impact. Alternatively, the
“Distributional effect” can be calculated by subtracting the impact in pure monetary
terms from the weighted value. Thus schemes that benefit those on incomes higher
than the average will have a negative distributional effect and vice versa.
3
This concept is known to economists as the “Marginal Utility of Consumption”.
Again, further previous work on variations in the distribution of income across Scotland can be found at
http://www.scotland.gov.uk/Topics/Built-Environment/Housing/supplydemand/chma/marketcontextmaterials/segment.
4
An example may clarify:
Suppose scheme A impacts those in income group 1 by £100 and scheme B impacts
those in income group 20 by £100.
The distributionally weighted impact of scheme A is £100 x 3.9 = £390
which comprises an impact of £100 and a distributional effect of (£390-£100)= £290
The distributionally weighted impact of scheme B is £100 x 0.38 = £38
which comprises an impact of £100 and a distributional effect of (£38-£100)= -£62