The Universal Credit can still improve Britain's welfare

Type: Think Pieces Written by Daniel Pryor | Thursday 12 December 2013

There is agreement across the political spectrum that the United Kingdom’s benefits system is unfit for its purposes; namely, to provide a minimum income (or ‘safety net’) and incentivise work. The need for reform is clear, with the relationship between welfare spending and severe poverty statistics speaking for itself; in the fifteen-year period from 1994-2009, increases in social security expenditure of over 50% have failed to significantly affect the percentage of the UK population living in severe poverty (defined as living below 40% of median income). Indeed, the chart below shows that the proportion of those in severe poverty actually increased over this time span.

Clearly, responding to the challenges posed by 21st Century welfare is not as simple as throwing more money at the problems to make them go away. With hundreds of thousands of people failing to claim benefits that they are entitled to, any reform must aim to reduce the complexity of the claiming benefits for eligible individuals, whilst increasing work incentives. Ensuring that our welfare system is simple to use for those that need to is an important step on the road to raising the incomes of the less well off to a reasonable standard.

Sources: Office for National Statistics/HBAI statistics from Department for Work and Pensions

It is these goals of simplicity and increasing work incentives that inform Universal Credit (UC), which first came to prominence in Iain Duncan Smith’s exposition of the scheme in a speech to the Conservative Party Conference in 2010. Discussing his intentions, he hoped that Universal Credit would “restore fairness and simplicity to a complex, outdated and wildly expensive benefits system”.

Almost three years down the line, Universal Credit still features prominently in the media, but largely for the wrong reasons. There is no doubt that there have been serious shortcomings in the implementation of Universal Credit to date, which have been detailed in the National Audit Office’s latest report on the progress of the project. The report highlights millions of pounds wasted on failed IT programmes, unrealistic timetables for implementation and a lack of transparency; these issues hardly fill one with confidence for the future of UC.

It is hoped that the recent appointment of Howard Shiplee (former Olympic executive) as director-general of the project will bring the experience and skill necessary to steer Universal Credit back on course. This piece will argue that despite the negative publicity surrounding Universal Credit’s implementation thus far, the concept itself is still worth supporting and will help large numbers of people find work and escape severe poverty. Behind the partisan games of political football being played out between parties lies consensus; all three major UK parties support Universal Credit in principle, and the reasons why will be set out below.

How does Universal Credit work, and what are its advantages?

Universal Credit is part of the Coalition’s Welfare Reform Act 2012, and aims to replace six working-age benefits/tax credits with a single welfare payment: income-based jobseeker's allowance, income-related employment and support allowance, income support, child tax credit, working tax credit and housing benefit. This payment will be accompanied by a single, constant taper rate (the rate at which a benefit is reduced to take account of earnings) of approximately 65%.

Consolidating all existing working-age benefits and tax credits into one payment simplifies the system massively: one application, one statement of earnings and entitlements, and one coordinating agency. A welfare system comprehensible to those that need to make use of it is essential. It ensures that the greatest possible number of those in severe poverty are provided with the minimum income they are entitled to. Making the UK’s benefits system easier for claimants to understand will help ensure that taxpayers’ money goes to those that need it. Therefore, the adoption of Universal Credit is expected to substantially increase take-up amongst those eligible to claim: tackling the trend of rising severe poverty that has taken place over past years.

Of course, it is essential that those who claim benefits are encouraged to find work, and the most effective way of doing so is by ‘making work pay’. This is, at least in part, accomplished through a lowering and streamlining of effective marginal effective tax rates (METRs). Marginal effective tax rates represent the amount of money forgone by working more hours through loss of welfare money and paying taxes. METRs under the current system are often inordinately high and unpredictable (see examples in the charts below). As a consequence, they act as a major disincentive to work for many people.

Universal Credit will help to address problematic marginal effective tax rates by introducing a single taper rate of 65%, meaning that those on low earnings will be better off on UC and work will pay more. Work incentives are also increased by the inclusion of an “earnings disregard” (£700 per year for single people): a significant improvement on the standard £260 per year (£5 per week) of the current system. UC’s taper rate will therefore only apply to earnings above this threshold, improving the attractiveness of work.

It is inevitable that in the short-term, more resources will be required to set-up the machinery by which Universal Credit can operate effectively. Official estimates tout the figure of £2.4bn as the total cost of implementing UC, but focusing purely on the short-run cost fails to highlight potential efficiency savings and the reduction of various costs that arise from unemployment. In the Centre for Social Justice’s report Dynamic Benefits, welfare reform proposals largely indistinguishable from the DWP’s version of Universal Credit are estimated to increase UK GDP by £4.7bn. In fiscal terms, the short-term costs of Universal Credit borne by the taxpayer are more than compensated for by significant increases in employment and the consequent prosperity this engenders.

 

Answering the detractors

There have been various criticisms levelled at UC which raise legitimate concerns about the specifics of the DWP’s proposals. One of the most common objections is that Universal Credit will be managed largely online, meaning that those who struggle to connect to the Internet or lack computer literacy may have trouble claiming benefits they are eligible for. Whilst it is true that without suitable provision of computing facilities and guidance this would affect some people, plans to install 6,000 new computers across Jobcentres is likely to remedy any lack of digital access. Claimants who can make use of the online system from home will benefit from not having to travel to their local Jobcentre, and at worst there will be no change from the current system for those who require assistance with their claims.

A further potential drawback of Universal Credit that has been highlighted is the move to welfare payments on a monthly basis, rather than the current system’s varying weekly, fortnightly and (in some cases) monthly payouts. The Social Market Foundation’s report on Universal Credit, Sink or Swim?, cites a sample of thirty households affected by the move to UC: the majority of which held negative opinions of monthly payments. This opposition stemmed largely from the issue of having to budget more responsibly, and concerns about running out of money before the end of the month. However, it can be argued that encouraging greater responsibility for financial planning could prove advantageous for households: for example, gaining experience of budgeting in jobs with a monthly salary. Moreover, the Department for Work and Pensions is looking to include the options of advance UC payments and alternative payment arrangements in extenuating circumstances, helping to mitigate any difficulties experienced from adjusting to monthly budgeting.

Conclusion

After starting in October this year, Universal Credit is due to expand to Jobcentres in Hammersmith, Rugby, Inverness, Harrogate, Bath, and Shotton; it is planned that this expansion will be completed by Spring 2014. Whether the government will meet its objective of UC being fully operational across the country by 2017 seems unlikely, but it is hoped that with new management and swift responses to the criticisms highlighted in the National Audit Office’s recent report, this important reform to Britain’s welfare system will be up-and-running by the target date.

The temptation to confuse valid criticisms of Universal Credit’s implementation with condemnations of the overall policy itself must be resisted. No policy is perfect, but as discussed above, there are concrete benefits that Universal Credit can bring to the lives of Britain’s poorest people. It will incentivise work, alleviate poverty, encourage responsible budgeting, and (in the long-run) bring the plethora of economic gains that are linked to increased employment. In these ways, the Universal Credit can work.