The current design of Universal Credit is not “fit for purpose” in 21st century Britain

Published on Tax and Welfare

The current design of Universal Credit is not “fit for purpose” in 21st century Britain

Change needed to end six week waits, recognise not everyone is paid monthly, and avoid big losses looming for lone parents

Universal Credit needs urgent change if it is to be fit for purpose and become the bold welfare reform originally planned, according to a new comprehensive review published today (Tuesday) by the Resolution Foundation.

Creating a simpler system that consolidates six benefits into one is a prize worth fighting for, rather than giving up on. But Universal Credit (UC) is currently at risk of both failing those most in need and losing the potential to be a welfare system fit for modern Britain, the Foundation argues.

The report sets out the components of a “fit for purpose relaunch” of the reform that should be rooted in the reality of 21st Century Britain, including:

  • Immediate procedural fixes, with concrete proposals to reduce the six week waiting period and rethink the requirement that everyone is paid monthly when new evidence shows that this is not the case for many people.
  • Tackling major design flaws, with action to improve the work incentives for lone parents and second earners, and a recognition that the problem facing us today is progression out of low pay rather than worklessness.

Concerns have rightly been raised about the current six week wait for new UC claims to receive a payment, given the reality that only one-in-seven working-age families reliant on such benefits have savings worth more than a month’s income.

The Foundation recommends shortening waits considerably by scrapping the current seven day waiting period and compressing payment processing days to ensure payments happen a week and a half earlier, at a relatively low cost of between £150-£200 million a year.

The report also notes that paying benefits monthly in arrears may work for those with steady jobs, but the timing of benefit payments needs to be more flexible to fit the diverse needs of different families. New analysis for the report, using actual bank transaction data, shows that the majority (58 per cent) of new claimants moving onto UC after leaving employment in the last tax year were paid either fortnightly or weekly in their previous job.

Other components of the relaunch should include faster payment of housing support, a simplified process for claiming childcare support and assessing the Minimum Income Floor, that limits support for the self-employed, annually rather than monthly.

Beyond these fixes, design flaws that undermine the role of UC in supporting family living standards and the labour market of 21st Century Britain also need to be addressed. At a time when working poverty has become a major challenge facing the country, cuts to UC mean it is set to be almost £3 billion a year less generous than the tax credit system it replaces. As a result it will leave working families an average of £625 a year worse off. However, this masks a significant mix of outcomes across family type:

  • The net impact on all two parent families in work is broadly neutral, though 1.1 million will lose an average of £2,770 a year.
  • Working single parents lose out, by an average of £1,350 a year. Almost twice as many lose (0.7m) as gain (0.4m), losing almost twice as much (£2,955 average annual loss v £1,600 gain).

The stronger work incentives meant to be created by UC have also been weakened by these cuts. In particular, the incentives for lone parents and second earners are crucial to a modern labour market but risk being undermined by the current structure of UC.

Large cuts to work allowances for single parents, meaning they can work far fewer hours before losing any benefits, risk leaving too many trapped at low levels of pay. Meanwhile over two thirds of potential second earners with children will keep no more than 40 per cent of their gross pay if they enter low paid part-time work.

The Foundation argues that this may discourage some low paid mums, and increasingly dads, from working longer hours or at all. This is a major risk given the importance of being a dual earner household in boosting incomes.

To ensure parity with the tax credit system it replaces, a £3 billion re-investment in UC support for working families, including higher work allowances for lone parents and a new allowance for second earners, is therefore vital to making a success of UC. Rather than relying on additional borrowing, funding could be provided by delaying a range of tax cuts that disproportionality affect the richest.

David Finch, Senior Policy Analyst at the Resolution Foundation, said:

“The government is rightly committed to the roll-out of Universal Credit, but will need to relaunch the benefit to both address the design challenges that are already visible and get ahead of those that will emerge in the years ahead.

“Urgent action is needed to reduce the six week wait and there are simple steps that can be taken now to bring it down, including scrapping the seven day waiting period before a claim is accepted.

“Looking further ahead there are major challenges to come, from how childcare is dealt with to ensuring equal treatment of the self-employed.

“Crucially, because Universal Credit is now almost £3 billion a year less generous than the benefits it replaces, it will leave working families an average of £625 a year worse off. Single parents are particularly hard hit, with almost twice as many losing as will gain, while second earners in couples will also face weaker incentives to work. Now is the time to put right these significant design flaws.

“The upcoming Budget provides an opportunity to relaunch Universal Credit – making it fit for purpose in 21st Century Britain.”