Ways for improving housing subsidies system

The task of elaborating modification proposals that would redirect housing subsidies towards low-income families has been set within Pilot #1 Cashing out housing subsidies based on standard rates and is somehow linked to Pilot #2 Cashing out housing and utilities privileges. Before this specific task was implemented, international experiences in cashing out privileges (Russia, Kyrgyzstan, and Moldova) and on designing housing benefits (Bulgaria, Czech Republic, Hungary, Lithuania, and Poland) were analyzed.

Also, an analysis of the current rules and the performance of housing benefits in Ukraine was carried out (based on household budget surveys from 2006 and 2008 and on the information collected from five pilot offices in the second half of 2009). This allowed us to conclude that improvements in the housing subsidy system should focus on improving targeting, mitigating the boost of the overall costs, and adjusting the implementation procedures rather than being confined to the “cashing out” issue alone.rnKeeping these in mind, several housing subsidy (HS) modification alternatives were considered. As a result, eight options were turned into hypothetical reform scenarios and further examined using the Household Budget Survey of 2008 and the available administrative data on housing support. These reform options intend to address the major weaknesses of the HS design such as the lack of clear rules to ensure that support goes to the poor, the lack of mechanisms preventing HS expansion in the case of a price and tariff increase, and the unintended bias towards single-member households and the complexity of using standard norms. The reform options include: rn1. Increasing the applicant’s obligatory payment on his/her housing and energy bill (up to 30%)rn2. Lowering obligatory payments (down to 10%) for the poorest multi-child familiesrn3. Implementing direct income tests (with thresholds at 2 or 3 subsistence minimums)rn4. Implementing a surface threshold (higher than actual standard norms)rn5. Harmonizing the granting of housing subsidies and low income benefitsrn6. Setting an upper limit on benefits (50% of the total applicant’s bill, 50% or 75% of the applicant’s own payment)rn7. Simplifying rules for setting the HS level (using standard norms expressed in UAH per square meter)rn8. Merging HS with assistance to low-income families (through the exclusion of x% of the housing bill within norms from the total household income and using a new income threshold)rnThe impacts of the selected scenarios in terms of both HS efficiency (changes of the overall expenditure and its distribution) and effectiveness (changes in reaching the vulnerable groups) have been analyzed. The results collected give us solid ground for making proposals for changes. Three reform alternatives are suggested for consideration. A “conservative” reform, quite rooted in the current HS design, would involve modifying the rules for HS calculation using simplified norms. A more advanced but still moderate option would include implementing the income threshold (at the level of 2 subsistence minimums), supported with the surface threshold and the obligatory payment adjustment. The most “radical” reform would consist of merging the HS with the assistance to low-income families, using the approach described. Each of these options would provide visible gains in reaching the poor and the vulnerable but would require an increase in financing. This increase differs among options, from almost negligible to quite substantial. Given that the first reform proposal may turn out costly, while the last one would involve major systemic changes of two benefit schemes at once, the moderate reform option is most strongly recommended.