This is the full text of the leaked letter expressing concerns over the Government’s welfare reform plans

Matthew Style

Private Secretary to the Prime Minister

Dear Matthew,

OVERALL BENEFIT CAP

As we discussed, I am writing in advance on the meeting of the Quad tomorrow covering the issue of the Overall Benefits Cap. My Secretary of State is attending the meeting taking place on Council Tax Benefit and is also likely to raise these issues given the implications it has for DCLG policies.

As you know we support the principle of the Overall Benefits Cap on the grounds of fairness. It is not right that a household on benefit should receive more than the average working household. However the specific implementation of the Overall Benefits Cap could cause some very serious practical issues for DCLG priorities.

Firstly we are concerned that the savings from this measure, currently estimated ay £270m savings p.a from 2014-2015 does not take account of the additional costs to local authorities (through homelessness and temporary accommodation). In fact we think it is likely that the policy as it stands will generate a net cost. In addition Local Authorities will have to calculate and administer reduced Housing Benefit to keep within the cap and this will mean both demands on resource and difficult handling locally.

Secondly, we are worried about the impact of this measure on our ability to build social housing for families through the new affordable rent product. To fund new affordable housing development providers need to be able to charge rents of up to 80% of the market levels but the impact of the Overall Benefit Cap will prevent them from doing so in many areas greatly reducing their financial capacity. Initial analysis suggests that of the 56,000 new affordable rent units up to 23,000 could be lost. And reductions would disproportionately affect family homes rather than small flats. For example it would be extremely difficult to fund any 4 bed properties, so desperately needed, anywhere in the country – disproportionately impacting on families and therefore children.

Finally, our modelling indicates that we could see an additional 20,000 homelessness acceptances as a result of the total benefit cap. This on top of the of the 20,000 additional acceptances already anticipated as a result of other changes to Housing Benefit. We are already seeing increased pressures on homelessness services. I understand that there may be a suggestion around requiring families to divert a percentage of their non-housing (benefit) income to cover housing costs. It is important not to underestimate the level of controversy that this would generate (likely to dwarf anything already seen on the HB only caps) and the difficulty of justifying this in policy terms as well as implementation.

However despite these issues we believe that there are ways to introduce this measure in a form which maintains the overall message whilst reducing the negative impacts outlined above. One of the most attractive options is to remove Child Benefit from the Overall Benefits Cap. This would be a fairer way to bring the benefits included in the Cap in line with working households, as a working household on the median £500 weekly earning would still receive child benefit on top of their income. This would also mean the overall message of the cap would not be lost. In practical terms it would also fit with the introduction of Universal Credit as Child Benefit will sit outside of this.

Just removing this one element would substantially reduce the negative impacts. The homelessness and child poverty risks set out above would be reduced – for example families with 4 children would be able to live in most parts of the country outside London and the South East. And it would also decrease the knock-on costs and impact on local authorities, and reduce the number of new affordable rent properties lost.

I should also mention that there are other measures which could reduce negative impacts, including calculating the median earning for families rather than households (which include single people) and an allowing a grace period before the Cap applies. We are also supportive of these.

Nico Heslop

Private Secretary to Eric Pickles