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There’s a debate going on up and down the country, and in Westminster about the welfare cap currently being introduced by the Coalition. The cap on total welfare benefit claims is £26,000 per household, or the equivalent of £35,000 after tax. According to Iain Duncan Smith (IDS) this is the average household income. In fact, the average (mean) household income is £33,000 or £22,440 after tax. Already, the government is being ‘generous’ in its averaging by using a median scale rather than the mean.

Who does it effect?

Obviously, welfare claimants. There is also the matter of children. By the government’s own modelling, households with more than 3 children will adversely feel the effect of the cap. But, the median of £26,000 after tax is based on a household consisting of a couple without children. Thus, one could conclude, that it punishes households with children regardless of the number.

Is £26,000 liveable in central London? Yes. Barely. The median annual rent for a 3 bedroom property in zones 1-2 is £20,800. I chose a 3 bedroom property because a 4+ bedroom property would be outside of the £26,000 threshold, even on the lower estimate, and a 2 bedroom property is too small for a typical family of 2 parents and 2 children and not be classed as homeless. This would leave £5,200 for energy, food, clothing, transport and miscellaneous spends. Health will, invariably, be the first to suffer as food portions and quality is cut, radiators are turned off &/c.

Families will be forced out of their homes. The government admit this. They’ll be pushed out to the cheaper areas and, continuing with the theme of London, move to cheaper housing in Greater London with a median annual rent of £15,600. Hurrah, a liveable area! Except the community they were living in has been destroyed, education interrupted and cheaper rental areas usually imply a lack of employment. Thus, the cycle of unemployment is compounded.

I do not envy the government as they are in a position, based on orthodox economics, whereby they are damned if they do cap welfare benefits (maintain the cycle of unemployment) and damned if they don’t cap welfare benefits (maintain cycle of unemployment).

What can be done about it?

As my friends at the Adam Smith Institute have been arguing for sometime – we face a supply crisis not so much a demand crisis.

There are about 450,000 vacancies at any one time. Employers struggle to fill them because a) there aren’t the skills to fill them and/or b) not enough experience in the workforce. If the unemployed were radically re-skilled to suit the labour market and given experience (read internships) then the crisis would be on the way to being solved. Jobs beget jobs. Soon enough unemployment would decline as the combined forces of supply and demand create more jobs.

However, in the development of any economy there will always be some who will be left behind. This is down to a variety of reasons which, ultimately, mean that they do not have the skills to enter into a labour market where the competition is between those who are highly-skilled.

How have we reached crisis point?

Politicians who are lagging behind the curve and often looking at the wrong curve.


NOTE: income statistics have been taken from the ONS and the IFS. Rent price statistics have been taken from london.gov.uk/rents