The daftest cut of all

The benefit cap and the ‘bedroom tax’ have made the headlines, but the reduction in Council Tax Benefit that will affect millions of people has been less talked about. But this may be the daftest of all, first because the government made no attempt to measure the amount that could be ‘saved’ in theory against the costs of implementing it and secondly because it could undermine the Universal Credit system the government is trying to introduce to increase incentives to work.

Before April, there was a nationwide way of calculating how much help people on low incomes should get with their council tax bills. It was simple, using the same system and approach as Housing Benefit calculations. 5.9 million households used to get some or all of their council tax paid.

Now each council has to choose how to divide up their ‘council tax benefit pot’ between claimants in their area, and the pot is 10% smaller than it was last year.  Pensioners getting Pension Credit are protected, so the average cut for all the other claimants would have to be larger than 10%, unless the council wants to use some of its other money to fill in the gap. For councils such as Bournemouth with a high elderly population, a 10% overall cut would translate into a 20% cut after excluding pensioners. A report from the Joseph Rowntree Foundation found that 1.9 million families who did not  pay any council tax are now likely to have to pay an average of £140 a year.

Amongst the problems councils have noted from the changes are:
  • Scheme documentation will have to be changed each time the scheme is revised- as councils do not know what they will get in future years from central government, this could be annual
  • Collection rates will suffer as small amounts have to be collected from people who are very close to the poverty line
  • Council tax will now be more administratively costly to collect
  • In practice much of the extra tax may simply have to be written off as the costs of trying to collect it will be higher than the likely receipts
  • Forecasting the council’s budget will be more difficult and could result in surplus/deficits

It is hard to overstate the problems councils are going to face collecting this extra council tax. My own council has decided “The best estimate, in the light of little relevant trend data to moreprecisely inform the judgement, is that bad debt provision for this additional revenue should be set at 50%.” So they are having to collect small amounts from people who have little or no spare money, and they are expecting to fail half the time. By any rational assessment, this makes these council tax changes an example of very poor public policy.

My council carried out a consultation in what residents think will be the fairest approach to handling the cut. One consistent theme was that people didn’t understand what they were being asked: “Despite testing the survey with local residents in the council’s Customer Centre prior to publication, informal feedback from the telephone interviews suggested that some respondents found the concept of this question and the answers offered difficult to comprehend.”

This applied to changes to Non Dependent Deductions and the Taper Effect particularly.  This is probably the reason these changes have received so little media coverage – the cuts are not thae same everywhere and are wrapped up in difficult to understand jargon. These cuts are nevertheless real.  Increasing the taper rate from 20 to 25% sounds like some minor bit of bureaucracy, but actually it is the same as raising income tax for poorly paid families by 5% a year:  for every £1 extra they earn, they used to lose 20p in Council Tax Benefit; now they will lose 25p.  An income tax hike of 5% would have made headlines, wouldn’t it?

Finally, the government doesn’t seem to have thought through the effects of devolving Council Tax Benefit to Local Authorities  at the same time as introducing Universal Credit, as this report explains. Again this is technical sounding and doesn’t make for great headlines – but the end effect could well be that poorly paid people face benefit withdrawal rates of over 90%. A great result for a government whose main aim was supposedly to increase incentives to work.

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  1. Jan Conroy says:

    Sara – I’d be interested to read your take on what happens when the £144(?) p.w. state pension comes in in 2017 when, IIUIC, all sorts of existing benefits will disappear.

    • The £144 will be above the Pension Credit level so new pensioners (the system won’t change for people already in it) won’t qualify, but Pension Credit will remain for existing claimants and anyone not entitled to the full state pension eg those who haven’t worked enough years. As getting the guarantee part of Pension Credit means a pensioner is entitled to Housing Benefit and Council Tax Benefit, some sort of equivalent will presumably be brought it – but just at the moment, with Universal Credit looming first, that looks very far into the future!

      I think we will have to wait until the government chooses to say more. I know this is very frustrating for people in their late 50s and early 60s who really want to know how some of the details about how much it will cost to buy back additional contributions years (as the requirement is being raised from 30 to 35) and how large the reduction in the £144 will be for people who have been contracted out for some years.

      Ros Altmann has an excellent summary of the current situation here: http://www.pensionsworld.co.uk/pw/article/altmanns-qa-on-new-flat-rate-state-pension-proposals-12322871.

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