Blog Post

Boroughs alone cannot pick up the pieces of a broken benefit cap

The benefits system should be acting as a lifeline for London’s most vulnerable households during the cost of living crisis, but at present it is failing to lift people out of poverty. Our Researcher Daniel Urquijo sets out the changes that need to be made to the benefit cap urgently.

The current cost of living is yet another warning that the benefit cap needs major reform. Households up and down the country are feeling the impact of inflation predicted to tower 7% by spring, surging energy prices, and war in Europe. Wages have also struggled to keep up with rising living costs, meaning that people’s savings  will take a bite for the time being. While dwindling savings are a cause of concern on their own, what happens to those without them?

Households living paycheque to paycheque have no wiggle room to weather the storm and will be affected disproportionately, as a larger portion of their income is spent on food and housing than wealthier households. As a result, Resolution Foundation reports that the households at the bottom 10% of incomes will be hit with over 10% inflation this year. What this means is that the very poorest in Britain will be forced to find a way to make ends meet, perhaps by not heating their home, switching to cheaper food brands, forgoing replacement for a broken item around the house, and so on.

Making ends meet is not just about consuming less; it is about the hours spent looking for suitable alternative activities for your children, the shame of having to reach out to others for help, or the constant worry that you will not be able to meet an unexpected expense. The latter is a significant issue in London: a Savanta poll that will soon be released by Centre for London shows that a quarter of Londoners would not be able to meet an unexpected £500 expense. In essence, making ends meet is about physical and mental exhaustion, which only contribute to the worsening of a wide range of outcomes for the poorest households.

The role of benefits

While the benefit system was designed to help during times of need, in its current form it is ill fitted to deliver the support needed by Londoners through this crisis. A core issue is the benefit cap, a limit on the benefits a household can receive. It was introduced in 2013 to incentivise people into work but in attempting this it has contributed to the worsening of the lives of the poorest.

The idea was that reducing income from benefits would incentivise people to seek income from work more attractive, but evidence suggests it had little effect on employment: only 5 out of every 100 affected households moved into work because of the cap. Instead, research shows that the benefit cap increased the prevalence of depression or anxiety of people at risk of being affected by the cap, with the potential “unintended consequence of pushing out-of-work people even further away from the labour market.” This is no surprise – a 2019 Work and Pensions Committee inquiry found that most capped households are either unable or face significant barriers to enter employment. As of August 2021, 81 per cent of capped households had children, and 76 per cent were single parents. Today’s job market requires people to take work at short notice which makes planning for childcare around working hours difficult – particularly so when there is more than one child to care for.

To make matters worse, while the benefit cap was first set at £26,000 a year – the average household income in the UK at the time, by late 2016 it was reduced to £23,000 in London, and £20,000 elsewhere. The cap has never been raised to keep up with inflation – so the value of government support falls day by day.

The London picture

Despite only representing 16 per cent of the English population, London accounted for 37 per cent of all capped households as of November 2021, or about 37,000 households. The disproportionate impact of the cap on the capital reflects London’s much higher cost of living – which is particularly troubling as London already enjoys a more generous cap. On average, capped households in London miss out on between £184 and £300 in benefits per month.

Given the impact on the cap on destitution or homelessness, the government encouraged local authorities to make use of Discretionary Housing Payments (DHP) to mitigate its impact on the most vulnerable households. These are discretionary and short-term payments made by local authorities to help people with their housing costs, but these are used routinely by boroughs to mitigate the impact of the cap. There are, however, two key issues with DHPs:

  1. Local authorities do not have access to data on their residents’ benefit claims, so they can only set up a DHP after a resident approaches them with their case – which is often late. Earlier intervention would prevent people from falling into hardship.
  2. Despite extra funding being allocated to boroughs, their DHP budget is far from the shortfall caused by the cap. In Barnet, for instance, £248,107 was spent between April and September 2021 on DHPs while the amount of benefits capped was somewhere between £752,397 and £1,227,500.

These issues are not new and are well documented. If government is serious about helping those in need during this cost of living crisis, it should be prepared to adjust some of the levers available to them within the benefit system.

Government should make sure that the cap does not stay frozen on 2016 levels, and instead update it regularly to reflect the basic costs faced by claimants. Importantly, the benefit system needs to do more to reflect the real cost of living in London as even households without children are heavily capped. Working with local authorities so DHPs reach vulnerable households at an earlier stage would also be highly beneficial, particularly in the context of homelessness prevention. Finally, the cap should be restricted to only those who are expected to be actively looking for work (that is, claiming Jobseeker’s Allowance, or Universal Credit and are in the “All work-related” activity group) as it currently punishes people who cannot work for not working.

There needs to be an end to the lack of empathy towards benefits claimants and a move towards truly helping them out of poverty – as it stands, the benefit cap has had the opposite effect.

Daniel Urquijo is Researcher at Centre for London. Follow him on Twitter here.