The under-occupancy Penalty was introduced by the 2012 Welfare Reform Act. It is known as the “bedroom tax” by agitators who want to misrepresent the penalty as a tax. It sounds better to be campaigning against a tax than against a penalty for under-occupying social housing.
The law defines how many bedrooms are needed by a family. For example one bedroom for an adult couple, another bedroom for a pair of sisters or brothers under 16 and so on. The penalty applies to people claiming Housing Benefit for social housing (Council or Housing Association provided). If people are under-occupying their property the amount of rent subsidy which they receive from the government is reduced. The basic idea being that public funds should only be available to support the basic amount of space needed. If people receiving Housing Benefit want to have a spare room then they should fund that themselves. The rhetoric which accompanied this policy explained how “hard-working families” often could only afford the minimum and so why should people in receipt of benefits be privileged over and above them. Horrible rhetoric which divided people and which objectifies people receiving benefits. (A classic maneuver of the kind analysed by Foucault).
There are of course exemptions and for people who start a new claim for Housing Benefit there is a 13 week grace period before the limit kicks in – in theory giving them time to move to a smaller property.
One of the practical problems with the scheme has been a lack of locally available smaller properties. A valid criticism of the scheme has been that it may force people to leave the social housing sector and move into the private sector. In reality it seems that very few families have moved.  It would in fact be irrational to move from a long-term secure socially managed property into the private sector – where landlords can put up the rents and turf you out at whim.
It seems to me that this policy is a good example of the dangers of an ideologically driven policy. From the point of view of right-wing members of the Conservative Party it makes sense. (In general Labour would go along with these kinds of measures – at least in general they tend not to roll them back when they come into power, though the current Labour Party might do more than previous ones were they ever to get into government). It has the right kind of “stand on your own two feet” feel to it. But it seems that whoever planned it did not think it through in practical terms. The people who planned will have been the kind of people with £10,000.00 in their immediate cash account and tens of thousands no doubt in their savings account. For these people moving house is a chore but no more. However; if you have no money then moving house is very problematic. You may need to produce a deposit before you can get the last one back (or if moving into the private sector produce one for the first time). You may need to start paying Council Tax for the new property before your old Council Tax is refunded. You may need to be vetted in some way. (Surveillance of tenants by landlords is now the norm in the private sector). Moving itself costs money. In addition people will have been asked to move shortly after the shock perhaps of losing a job – and in those circumstances it seems rather cruel to say “And now you have 13 weeks to move to a smaller house”. I doubt if the people who planned this have any idea of what it is like to live on the breadline.
Of course the underlying ideology behind this policy is the fixation on markets. This has been the flavour of British politics for the last 30 years. The idea has been that where the market does not exist (for example in the state school system and in the health system) even so to introduce “market incentives” – which mimic market conditions. This policy is no exception. The idea is to manipulate the situation – by the reduction in rent grants – and then leave the “market” to do the rest. It seems that in this case the “market” failed – people either can’t move (no suitable properties available) or won’t (they don’t want to be forced into the private sector).
My solution is not liberal and definitely not driven by devotion to the “market”. I would simply change all social housing contracts so that the contract was for the provider to provide a property of a suitable size. If the family became smaller than the housing provider would have the right to simply reallocate the family to a new home. (Of course there would have to be limits and controls e.g. no more than one move a year and so on). This is called “rational planning”. It would efficiently solve the problem of under-occupancy. It would not cause undue hardship. But, for some reason, no party including the Labour party, is able to countenance this kind of rational planning approach. So – they will go on fiddling with pseudo-market contrivances – the Tories implementing them in a harsh way and Labour implementing them in a slightly more user-friendly way but at greater cost to public funds. This fixation on the ideology of the market is the bedrock of this madness.