This paper tracks the evolving impact of the coronavirus outbreak on the labour market.
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Effect of Universal Credit on children
“That this House notes that, while some aspects of the universal credit system are likely better to support families with children, some groups of children and families are particularly likely to lose out, and many may struggle with elements of the new approaches to payment and administration; further notes that there has been no revised impact assessment to take account of significant cuts to the work allowance; and calls on the Government to re-assess the effect of its policy on universal credit in light of those cuts and to ensure that the number of children in poverty, and particularly those in working families, falls as a result of the introduction of the new universal credit system.”
Overview of Universal Credit
Universal Credit (UC) is a new benefit which is to replace means-tested social security benefits and tax credits for working-age individuals and families. The aim is to simplify and streamline the benefits system, improve work incentives, tackle poverty among low income families, and reduce the scope for error and fraud. UC was first introduced for a small subset of new claimants in certain areas in 2013, and is gradually being rolled out to new claimant groups. The benefit is not expected to be fully introduced until 2021.
Public Accounts Committee report, Universal Credit: progress update
On 3 February a report from Public Accounts Committee (PAC) highlighted concerns over the roll-out of Universal Credit concluding the programme still has “a long way to go”. While acknowledging that Universal Credit had stabilised and made progress since the PAC’s previous report on the programme in 2013, the Committee observed-
However, there remains a long way to go. Implementation of Universal Credit so far has focussed mainly on the simplest cases and the Department for Work & Pensions has again delayed the programme. The completion date for the roll-out of its new digital service is six months later compared to when we looked at the programme only a year ago, and the Department now expects that Universal Credit will be fully operational in March 2021. The Office for Budget Responsibility forecasts that there will be a further six-month delay beyond the Department’s latest planned end-date. We remain disappointed by the persistent lack of clarity and evasive responses by the Department to our inquiries, particularly about the extent and impact of delays. The Department’s response to the previous Committee’s recommendations in the February 2015 report Universal Credit: progress update do not convince us that it is committed to improving transparency about the programme’s progress.
The Report urged the Department to “set out and report publicly against a wider set of clearly stated milestones”, and outlined areas it expects these to cover.
It also called for clarity on the business case for UC, in light of recent changes to the benefit, and recommended changes to the way the Department evaluates the programme as the roll-out proceeds.
Changes to Universal Credit
Summer Budget 2015 announced a series of changes to Universal Credit and, in advance of the full introduction of UC, to tax credits:
- A reduction in the income threshold in tax credits, and an increase in the withdrawal rate (“taper”), from April 2016
- Reductions in the “work allowances” for most UC claimants, from April 2016
- Limiting the child element of tax credits and UC to two children for new claims and births after April 2017
- Removing the family element in tax credits (and the corresponding first child premium in UC) for new claims from April 2017
Following the Government’s defeat in the House of Lords on 26 October, the Chancellor announced in Autumn Statement 2015 that the planned reduction in the tax credits income threshold and increase in the taper rate would not now go ahead. The other changes listed above are, however, being implemented.
The reductions to the UC work allowances announced in the Summer Budget will ultimately have a similar impact to the changes to tax credits which are not now going ahead, the main difference being that while families would have been affected by the tax credits immediately from April 2016, the full impact of the UC changes will not be felt until UC is fully introduced. Although the impact varies according to household circumstances, overall the changes mean a significant reduction in the generosity of UC, and for some groups a reduced incentive to enter or progress in work.
The Government states that most analyses of the impact of the UC changes fail to take into account the full package of policy measures affecting families, including elements such as increases in the personal tax allowance, the National Living Wage, and better childcare provision. Furthermore, it points out that analyses fail to account for the dynamic impact of UC, including changes in behaviour in response to improved opportunities to move into and progress in work. The Government is also providing help and support to seek more or better paid work, to “recoup the loss” from the work allowance changes. The Social Mobility and Child Poverty Commission believes however that it will be “very difficult” for many families to increase their hours and pay to avoid big cuts to their incomes compared to the current system.
- Commons Library briefing paper on Universal Credit changes from April 2016
- Social Mobility and Child Poverty Commission State of the Nation 2015 report
Institute for Fiscal Studies analysis of the effects of UC
In an analysis published as part of its February 2016 Green Budget report, the Institute for Fiscal Studies found that a series of pre-emptive cuts meant that introducing UC would in the long run reduce the generosity of the benefits system – including to working families. UC would still however do a lot to help make work pay for many of those who currently face the most severe disincentives.
Looking at the long run impact of Universal Credit – when transitional protection for claimants moving from existing benefits is exhausted – IFS found that UC strengthens financial work incentives only slightly on average, but this masks significant effects in both directions for different groups. It noted:
UC will dramatically reduce the number facing very weak financial incentives to move into or stay in work. The number of people who lose more than 70% of their pay in taxes and withdrawn benefits (or would lose that much if they moved into work) will fall by two-thirds from 2.1 million to 0.7 million.
UC will tend to weaken the incentive for single parents to be in work, and to strengthen the incentive for couples to have one person in work (rather than none or two). On average, working single parents will effectively keep 8% less of their earnings under UC than under the system it is replacing, because of the way UC is withdrawn as their earnings rise (a disincentive to work made significantly greater by the July Budget cuts).
Looking at the financial incentive for those in work to earn more (e.g. by increasing hours of work or moving to a better paid job), UC again tends to strengthen incentives where they are currently weakest. The 800,000 working individuals who would currently keep less than 20p of an additional pound earned (of whom 600,000 would keep less than 10p) would all keep at least 23p if the long run UC system applied now.
Turning to the long run impact of universal credit on incomes, IFS found that:
Introducing UC will cut annual benefit spending by £2.7 billion in total. (This is on top of other benefit cuts such as the four-year freeze to most benefit rates.) When first proposed UC was intended to be more generous than the current system, but cuts to how much recipients can earn before their benefits start to be withdrawn have reversed this.
Among working households, 2.1 million will get less in benefits as a result of UC’s introduction (an average loss of £1,600 a year) and 1.8 million will get more (£1,500 average gain). Among the 4.1 million households of working age with no-one in paid work, 1 million will get less (average loss of £2,300 a year) and 0.5 million will get more (average gain of £1,000 a year).
Working single parents and two-earner couples are relatively likely to lose, and one-earner couples with children are relatively likely to gain. Among those currently receiving one of the benefits being replaced by UC, working single parents would be over £1,000 a year worse off on average if the long run UC system applied now, but one-earner couples with children would gain over £500 a year on average.
Owner-occupiers and those with assets or unearned income are relatively likely to lose, but working renters are relatively likely to gain. This has the implication that UC will likely focus support more on those with long-term (rather than just temporary) low incomes, but it also weakens the incentive for some to save.
The IFS report also notes many other changes associated with UC which could also be significant, eg expanding job search conditions to more people and removing the need to start new benefit claims when moving into work could act to increase employment and earnings. Early evidence suggested UC had had a positive impact on employment among the small group already affected, but it wasn’t yet possible to draw firm conclusions about long term impacts. The IFS commented that moving towards monthly benefit payments to one member of the household and removing direct payments to landlords may be riskier.
In a press release, Robert Joyce, an Associate Director at the IFS and an author of the report, said:
“The long run effect of universal credit will be to reduce benefits for working families on average – a reversal of the original intention. However, the potential gains from simplifying the working-age benefit system remain mostly intact: universal credit should make the system easier to understand, ease transitions into and out of work, and largely get rid of the most extreme disincentives to work or to earn more created by the current system.”
- Green Budget chapter on The (changing) effects of universal credit
- IFS press release, Universal credit cuts support for working families, but helps make work pay where current system creates worst problems
Resolution Foundation report, Universal Challenge – making a success of Universal Credit
A report published by the Resolution Foundation on 3 May stated that the latest series of cuts to Universal Credit risked leaving UC “as little more than a vehicle for rationalising benefit administration and cutting costs to the Exchequer” and that “any ambition for supporting and rewarding work and progression looks very hard to achieve under the revised proposals.”
The Resolution Foundation found that, even when considered alongside policies designed to boost incomes, including the National Living Wage and income tax cuts, relative to the current system without those measures in place, the latest version of UC implied:
3 million working families entitled to support in the tax credit system will no longer be entitled to any in-work support, leaving them £42 a week worse off on average;
A further 1.2 million are set to receive UC, but be an average of £41 a week worse off;
1.7 million still in receipt of UC will be better off by an average of £38 a week, in part due to the more generous treatment of housing costs; and
Only around 200,000 families – a mix of those without children and couple parents – who are no are longer entitled to UC at all will be overall better off following cuts to in-work support and boosts to income from the National Living Wage and income tax cuts.
The report sets out a “three point plan” for the new Secretary of State, designed to ensure that UC will provide the support needed for families moving into and progressing in work in the future, and to make implementation as simple as possible. The report argues that the new Secretary of State for Work and Pensions should “restate and reclaim the role of UC in supporting more people into work and then boosting earnings”’ rather than being a source of savings for the Treasury.
It recommends that the Government-
Ensure that the incentives UC creates are focused on those most likely to respond and in most need of support. With the employment picture vastly improved over recent years and levels of worklessness in households dropping dramatically, UC must be refocused to meet the living standards challenge of the future rather than the past.
Embrace the challenge of tackling low pay and progression. Despite the welcome stride taken forward with the implementation of the National Living Wage, in-work poverty and low pay look set to remain key challenges in the coming years – UC must be ready to meet them.
Take the chance to reassess the way in which the UC system itself functions and the processes people must go through when making their claim. As currently designed, UC piles extra burdens on recipients, these could be eased. Making people’s lives more difficult may make them resistant to the change UC brings. Requiring recipients to provide complex information so the system can calculate entitlements risks creating errors and mistakes that could cause implementation to stumble.
- Universal Challenge – making a success of Universal Credit
- Stick or Twist – decision time for Stephen Crabb on Universal Credit, Resolution Foundation blog by David Finch, 4 May 2016
- The roll out of Universal Credit will lead to a postcode lottery of winners and losers, Resolution Foundation blog by David Finch, 12 April 2016
Universal Credit and disabled children
UC rationalises support for disabled people by replacing the existing disability premiums and additions in means tested-tested benefits and tax credit with additions payable at two rates only. People with severe disabilities will benefit from the changes, but disability organisations are concerned that some groups of disabled people will get less than they do under the present system. There is particular concern that some families with disabled children will get significantly less than they currently do through tax credits.
In a recent briefing the charity Contact a Family states:
Under Universal Credit extra payments for a disabled child are to be cut by more than 50% for the majority of disabled children.
Consequently many families with a disabled child will be worse off. In particular those families whose caring responsibilities prevent them from working and who qualify for the lower disability element appear certain to be worse off by at least £1600 per year. This is because there is no prospect of them seeing the reduction in their disabled child element offset by other features of the Universal Credit designed to make work pay.
Whilst it is possible that some working families could see the reduction in their disabled child element offset by other features of Universal Credit, this is now less likely as a result of cuts to Universal Credit work allowances from April 2016.
It seems certain that the number of families with disabled children who will be worse off is likely to be significantly more than 100,000. Many of these families are already struggling to afford basic essentials such as food and heating. The impact of a further cut of more than £1600 a year for many is likely to be increased debt, stress and ill health.
Contact a Family is calling on the Government to reverse the reductions to the lower disabled child element under Universal Credit.
- Commons Library briefing paper on Welfare reform and disabled people
- Commons Library briefing on the Draft Universal Credit Regulations 2013
- Contact a Family briefing, Universal Credit and cuts to the disabled child element
Documents to download
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Explore constituency-level data on people claiming unemployment benefits using the interactive dashboard