Housing Standards 2002/03: Financial Affordability and Attitudes towards Housing

3. Critical analysis of state expenditures for housing

Introduction

In principle, there are two ways for the state to ensure greater equality on the housing market through the redistribution of wealth, thus ensuring the greater affordability of housing for low- and middle-income groups of households: income-tested cash allowance, which increases the income of needy households (housing allowance, also demand-side subsidies support or subsidies per head); and an allowance decreasing housing costs, which as a consequence reduces the expenditures of needy households (subsidy for the construction, modernisation or operation of social housing leading to a reduction of the rent under the market level, also supply-side subsidies or bricks-and-mortar subsidies).

If we examine the efficiency of the two redistribution models through the lens of economic theory, the income-tested cash allowance is more efficient than the contribution aimed at reducing housing costs because the "rewarded" household can achieve greater utility related to the consumption of all goods than in the case of equally costly support reducing the housing costs. In practice, the situation is not necessarily quite that easy. The goal of redistribution is not usually to achieve a greater efficiency of the state intervention but also to achieve the greatest effectiveness of the intervention (i.e., the funds allocated for a housing consumption increase must be actually spent on housing). With respect to public expenditures, effectiveness is often far more important than efficiency, and therefore we can quite easily imagine a situation where the state would opt for a solution that is less efficient but the aid reaches where it is needed. If the task of state intervention is to increase housing consumption rather than increase the consumption of other goods (i.e., to increase the living standard as such), the state should opt for a form of intervention that will reduce the housing costs. Such an intervention may also be preferred for political reasons because it is often easier to ensure the minimum degree of housing consumption through supply-side subsidies than through demand-side subsidies, and such a measure is more likely to be approved; like education, for example, it is politically more amenable, transparent and easier to ensure free-of-charge basic education for the poor than to pay the poor an allowance to be used to pay for education.

Although no political representation has yet cast doubt over the important role of the public sector in ensuring greater equality in housing consumption, during the 1980s and 1990s most EU countries introduced drastic housing policy reforms, cuts in public expenditures for housing, and shifted away from the relatively expensive supply-side subsidies to the cheaper demand-side subsidies. Debates are wide ranging (and in many respects quite generic) as to whether this trend is truly "correct" and whether the shift away from the subsidizing supply is one that should be emulated.

In cases when the state continues to contribute to housing, it generally occurs after a critical analysis of the efficiency and effectiveness of the potential intervention. While efficiency is defined through the Pareto lens ^[1], effectiveness is understood as the extent to which the originally defined goals of state intervention have been met, i.e., whether the funds were targeted correctly and whether aid reached those whom it should. The welfare economy, however, does not leave the issue of efficiency completely at the discretion of the lawmaker or cabinet, who often do not even define the objectives of an intervention, and differentiates between vertical and horizontal effectiveness. Vertical effectiveness measures the extent to which an instrument (a housing allowance, a social flat) is actually allocated to those who need help (i.e., mostly low-income households) and not vice versa. Horizontal effectiveness measures the extent to which the needy are excluded from the programme.

Vertical effectiveness of housing policy instruments is measured using a comparison of the household income distribution along the Lorenzo curve with the distribution of social transfers (usually measurable in monetary units). The measure of transfer distribution in housing policy in Great Britain is provided in the following figure (Cornuel 1992: 44).

The Lorenzo curve of equal income distribution captures a theoretical situation of completely equal distribution of income in society, i.e., for example, 40% of households receive 40% of the total income of all members of society. In comparison, the bold interrupted line in Figure 1 shows the actual income distribution in Great Britain in 1989. As is clear from the Figure (and the situation is similar in other countries), the highest vertical effectiveness (i.e., correct targeting of aid) is achieved with respect to targeted demand-side subsidies in rental housing (housing allowance); conversely, deduction of interest payments from the tax basis yields the lowest effectiveness. Although the tax deduction curve is above the actual income distribution line (if it were below the income distribution line, then a truly dubious redistribution would be involved with respect to vertical effectiveness), but its location under the Lorenzo curve of equal income distribution indicates that, in absolute terms, the support increases with increases in income. Therefore, some countries have already abolished this type of support (even in Great Britain, we would not find tax relief there now) or have restricted its use (i.e., maximum deduction amount, introduction of a single tax rate for deduction purposes etc.).