Effect of Welfare Reform and Work Act 2016

Andrew Mackley; David Foster; Manjit Gheera; Richard Keen; Steven Kennedy; Wendy Wilson

The incoming 2015 Conservative Government announced a package of welfare reforms – over and above those legislated for by the Coalition Government – aimed at delivering additional savings of £13 billion a year by 2020-21. Further background to these changes can be found in Library briefing CBP-7252, Welfare Reform and Work Bill 2015-16.

Social security and housing measures in the Welfare Reform and Work Act 2016 included:

Lowering the household benefit cap threshold from £26,000 for a family and £18,200 for a single person, to £23,000 in London (£15,410 for a single person) and £20,000 (£13,400 for a single person) elsewhere in the UK.
A four-year benefits freeze.
Limiting support through Child Tax Credits/Universal Credit
The abolition of Employment and Support Allowance Work-Related Activity Component
Changes to conditionality for “responsible carers” under Universal Credit
Replacing Support for Mortgage Interest with Loans for Mortgage Interest
Reducing social housing rent levels by 1% in each year for four years from 2016-17

Together with changes to tax free childcare and ending automatic entitlement to Housing Benefit for 18-21 year olds not included in the Act, HM Treasury forecast these measures to save around £3.5 billion per annum in 2017-18, rising to £11.7 billion per annum in 2019-20 and £12.7 billion in 2020-21.

The chart below shows total savings from measures announced at the Summer Budget 2015, the majority of which were legislated for by the Welfare Reform and Work Act. Costings are from table 2.2 of HM Treasury’s Budget 2016 and Spring Budget 2017 “red books”.

Savings from measure announced at Summer Budget 2015

The Government later abandoned two policies announced at the Summer Budget 2015: a change in the tax credits taper rate to 48% and plans to implement “pay to stay” for higher income social housing tenants.

Reducing the household benefit cap

The Coalition Government argued that the benefit cap would increase incentives to work; introduce greater fairness into the welfare system between those on out-of-work benefits and taxpayers in employment; and make financial savings and incentivise behaviours that reduce long-term dependency on benefits. DWP estimated that the new lower benefit cap would affect 88,000 households, compared with around 20,000 under the previous policy. Around a third of the affected households were expected to be in London or the South East, although the cap has – for the first time – affected substantial numbers of households in other parts of Great Britain. Critics said that the lower cap was unlikely to incentivise people to move into work, and would have a significant negative impact on families. Social landlords, whose tenants are heavily reliant on Housing Benefit to meet their rent commitments, were concerned that a lower benefit cap would render a substantial number of their homes, particularly those let on affordable rents, unaffordable in London and the South East. In turn, they argued that an insecure rental stream could have implications for attracting private funding for the development of new affordable housing.

Further details are given in Commons Library briefing SN06294, The Benefit Cap. The latest statistics on the numbers affected by the benefit cap can be found in the DWP statistical bulletin Benefit cap: number of households capped to November 2017, 1 February 2018.

Four-year freeze in working-age benefits

The Summer Budget 2015 Red Book said that the freeze would “ensure that it always pays to work, and that earnings growth overtakes the growth in benefits.” Critics say that the benefit freeze is arbitrary, and places the poorest families at risk if inflation is higher than expected. Higher inflation means a sharper decline in the real value of the benefits and tax credit elements which remain frozen.

Since 2016 the Consumer Price Index (CPI) has increased sharply – see the Commons Library briefing Inflation: Key Economic Indicators (16 January 2018). The September 2016 CPI – which determined the increase from April 2017 in the benefits and tax credit elements not subject to the four-year freeze – was 1.0%. The September 2017 CPI – which determines by how much the benefits not subject to the freeze will increase from April 2018 – was 3.0%.

In a report published on 8 November 2017 (Recessions, income inequality and the role of the tax and benefit system, IFS Report R137), the Institute for Fiscal Studies estimated that under the latest inflation forecasts from the Office for Budget Responsibility, the real value of benefits affected the freeze on working-age benefits would reduce by 5% between now and 2020, reducing Government spending by over £3 billion a year. The report also comments that the benefits freeze, along with other cuts to working-age and child benefits and the introduction of the less generous Universal Credit, low-income households could be left “more exposed to the impact of future recessions.” An accompanying IFS press release stated:

If the falls in the earnings of workers seen between 2007–08 and 2011–12 happened again now, the poorest 30% of working-age households would see their after-tax incomes fall by an average of only 39p for every £1 fall in pre-tax earnings. This is because of the offsetting impact of lower direct taxes and higher benefits. But when benefit cuts currently being rolled out are fully in place, that figure rises to 53p for every £1. Some working households currently receiving in-work benefits will no longer be entitled, and so won’t see their benefits rise as soon as their earnings fall. Some of those who are still entitled will see benefits rise less when earnings fall.

This matters. The Office for Budget Responsibility puts the chances of a recession in any five-year period at 50:50. Economic uncertainty is currently high. When the next recession does hit, the tax and benefit system will offer less support to low-income households.

The government is in the process of implementing a number of significant cuts to means-tested working-age benefits. The biggest are a cash freeze in most working-age benefits, cuts to child tax credit, and the introduction of the less generous universal credit. These cuts make low-income households worse off, while reducing benefit spending and, potentially, strengthening work incentives. But another part of this story is that these benefit cuts mean the government will, by default, provide less insurance to households in the event that their earnings fall.

In a report published on 4 December 2017, the Joseph Rowntree Foundation described the four-year freeze in working-age benefits and tax credits as the “single biggest policy driver behind rising poverty, hitting families in and out of work” (Joseph Rowntree Foundation, UK Poverty 2017).

In September 2017, the National Audit Office published a report on Homelessness in which the freeze in Local Housing Allowance rates was identified as a contributing factor in increases in homelessness:

Changes to Local Housing Allowance are likely to have contributed to the affordability of tenancies for those on benefits, and are an element of the increase in homelessness. Since 2011, the Department for Work & Pensions has introduced a series of welfare reforms, including capping and freezing Local Housing Allowance. These reforms have been designed to reduce overall welfare spending and to provide incentives for benefit recipients to take up employment. They have reduced the amount of household income that it is possible to derive from benefits where the Local Housing Allowance applies. At the same time, rents in the private rented sector in much of the country — London in particular — have increased faster than wage growth. All of these factors appear to have contributed to private rented properties becoming less affordable, which in turn is likely to be contributing to homelessness caused by the ending of an assured shorthold tenancy.

Limits to support for children in tax credits and in Universal Credit

The “family element” in tax credits and the equivalent addition in Universal Credit has been abolished for new claims from April 2017, and the per child element in tax credits and Universal Credit to two children for births after April 2017. The Government justifies this on the grounds that families in receipt of means-tested benefits “should face the same financial choices about having children as those supporting themselves solely through work.” The two measures will eventually yield savings of £5 billion a year, with the two child limit accounting for around £3 billion. Around 900,000 families with three or more children currently receive tax credits. There are limited exceptions to the rule including where children are born as a result of “non-consensual conception.” For further information see Commons Library briefing CBP-7935, The two child limit in tax credits and Universal Credit.

Abolition of the ESA Work-Related Activity Component

The Employment and Support Allowance Work-Related Activity Component (WRAC) – and the equivalent element in Universal Credit – was abolished for new ESA claims from April 2017. This involves a reduction of £29.05 a week (2017-18 rates) and aligns the rate of payment with those claiming Jobseeker’s Allowance (£73.10 a week). Existing claimants were not affected, while there is protection for those who may move into the ESA Work-Related Activity Group or Universal Credit equivalent from the Support Group. The changes were introduced to “remove the financial incentives that could otherwise discourage claimants from taking steps back to work”. The changes were widely criticised by disability charities. The idea that the WRAC incentivises claimants to not look for work has been particularly disputed. Alongside the changes, the Government announced “new funding for additional support to help claimants return to work”. For further information see Commons Library briefing CBP-7649, Abolition of the ESA Work-Related Activity Component.

Support for Mortgage Interest

The Welfare Reform and Work Act 2016 included measures to provide for assistance with mortgage interest payments to be paid in the form of a loan secured against the claimant’s property, as opposed to a benefit. The Loans for Mortgage Interest Regulations 2017 (SI 2017/725), which set out the detail of the scheme, came into force for most purposes on 27 July 2017. From 6 April 2018, all claimants seeking assistance with mortgage interest payments must have applied for a loan. Full details can be found in section 7 of this Library paper: Support for Mortgage Interest (SMI) scheme. The Government has rejected suggestions that claimants will be put at increased risk of repossession because of the change.

Social housing rent reductions

As part of the Summer Budget 2015 the Chancellor announced that rents in social housing would be reduced by 1% a year for four years resulting in a 12% reduction in average rents by 2020-21. Measures were included in the Welfare Reform and Work Act 2016 to require social landlords to reduce the rents payable by individual tenants by 1% each year between 2016 and 2019.

Background and discussion on the impact of the rent reduction policy can be found in section 3 of this Library paper: Rent setting: social housing (England). On 2 March 2018 Inside Housing reported that an analysis by Savills Housing Consultancy had identified a 9% fall in associations’ capacity since the requirement for annual rent reductions began.