When ‘welfare’ is infrastructure

On Tuesday morning George Osborne was asked by the BBC’s Evan Davis whether he’d rather fund Crossrail 2 or trans-Pennine rail, assuming that both projects had a positive benefit to cost ratio. Politicians tend to shun hypothetical questions but the Chancellor of the Exchequer used this one to make the following argument:

‘I hope we don’t have to make a choice between the two. I think the real choice in our country is actually spending money on this big economic infrastructure, transpennine rail links, Crossrail 2 in London and the like, and spending money on, for example, welfare payments which are not generating either a real economic return and at the same time, are trapping people in poverty.’

Whenever someone mentions what the “real” this or that is, be careful. There are many choices involved in how the British state should spends its tax revenues and indeed what size the state should be in the first place. To reduce them to one “real” choice representing a fraction of overall spend is like saying that the real choice I face is between a Heart of Midlothian season ticket and feeding myself. (Essentials, both.)

Still, it is perfectly sensible to argue that the state should spend more on investments such as education and infrastructure relative to some benefits and tax avoidance. What Mr Osborne misses, however, is that under the coalition, infrastructure, in the form of housing, and social security benefits have become increasingly entwined.

As my colleagues Jim Pickard and Kate Allen have reported, the cost of housing benefit has increased rapidly, from £17bn a year in 2008/09 to a forecast of £27bn by 2018/19. It is taking up a growing share of the overall “welfare” budget. There would be less of a “real” choice to make if its costs had been brought under control.

Housing benefit is a rent subsidy for some households who have on no or low incomes. Its cost has risen for four related reasons. First, there are more people in the private rental sector. Second, rents in the private rental sector are higher. Third, the policy of “affordable” (like “real” this “affordable” is a misnomer) rents has meant that “housing benefit [is] being used to bridge the gap”, as Kate and Jim write. In essence, as Anthony Painter notes, the policies of the department for communities and local government are being paid for by the department for work and pensions. Government is working at cross purposes: spending more and less at the same time.

Fourth, more and more working families are now receiving housing benefit – due to a mix of rising rents, lower earnings and out-of-work families finding jobs that don’t pay enough to take them out of receipt of social security benefits altogether. Welfare traps people in poverty in large part because poverty traps people in welfare.

This fourth point is well explained by Declan Gaffney, whose chart is pasted below:

The lines show the number of people/households on different types of benefits over time. The black line is the number of housing benefit cases for working age people. The various pastel shades in the background refer to different governments – housing benefit volumes began rising under New Labour (green and yellow) and has continued under the coalition (purple). What unemployment benefit was for the Thatcher’s administration, housing benefit is for the Conservatives and Lib Dems.

Mr Osborne is right that there are choices to be made by government in how it spends its money. But to completely separate infrastructure and “welfare” misses that in the long term one way to get the benefits bill down is through infrastructure policy – land reform and loosen planning restrictions so that Britain builds more houses. This might not be a “real” choice but it is a real policy mess that needs a fix.