The Bedroom Tax and the Counter Intuitive Truth that Cost-Cutting Increases Costs

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I wanted to talk today about the bedroom tax. The bedroom tax is a new policy idea from the British Government. It goes something like this: The Government provide housing benefit to lower income families. If such families have an extra bedroom, i.e. if their house is under occupied, they will lose 14% of their benefit. If they have 2 or more bedrooms they will lose 25% of their benefit. The reason for this change in rules is to save £480 million. I.e. it’s a cost cutting exercise. Ministers say those who can’t afford the reduction in benefit will be encouraged to ‘move to smaller properties’. (‘Bedroom tax will be costly disaster, says housing chief’, The Guardian, available from: Accessed on 31st of March, 2012.)

Many people who claim this benefit will live in what in England we call council houses. These are houses provided by the government via the local council. The rents on these properties are quite low. Many of these houses have two or three bedrooms. Those who live alone in a two bedroom house but who cannot afford the 14% reduction in their housing benefit can, for example, request from the council a one bedroom flat (apartment) or house. But there aren’t that many of those. What that means, then, is that those who cannot afford the 14% reduction will move into privately owned houses, whose rents are higher than the houses provided by the council.

At least two things (that I can think of) will happen in such a scenario:

  1. The cost of the rents in the private sector will go up, as the demand for one-bedroom flats will go up.
  2. The money that the local governments used to make via the rents on the council houses will now be redirected to landlords in the private sector. (Good for landlords, bad for the local government.)

What that means, then, is that the government won’t cut-costs but actually increase them. For illustration purposes, I’d like to do some simple maths.

  • A two bedroom council house costs £100 a week.
  • A one bedroom privately owned rental house costs £150 a week.
  • If the tenant can afford it, they will stay in the two bedroom house and the government will save £14 a week.
  • If they tenant cannot afford it, they will move into the private house and the government will lose £50 a week. I.e. in an attempt to cut costs they actually increased them.

Hidden Costs

There are of course hidden costs to this policy, which neither the government nor I can know. We can, however, think about a couple of scenarios.

  1. An older couple, whose children have moved out, and who do have a spare bedroom, would either lose some money or be forced to leave.
  2. Divorced or separated parents who have a child need a spare bedroom so the child can visit them on the weekend or during school holidays. The parent with the spare bedroom would lose some benefit or have to move, which means the child cannot stay over or will have to jump in bed with mummy or daddy. Cosy if the child is five, awkward if the child is a teenager.

My Thoughts

This British Government are ideologically opposed to a welfare state. What they are doing, therefore, is hiding an attack on the welfare state behind a smoke screen of cost-cutting. The only beneficiaries to this ‘bedroom tax’, that I can see, are the landlords of the privately owned houses. When viewed through the lens of cost-cutting, the bedroom tax doesn’t make any sense. It does, however, make perfect sense if your goal is to reduce the welfare state (and by doing so punishing the poorest in your society).