With the benefits of benefit reform diminishing, Universal Credit needs a new direction

Published on Tax and Welfare

Another busy period of Brexit debate has pushed other big domestic issues out of the headlines. This is particularly true of Universal Credit (UC) – where two key government publications last week have slipped under the radar.

In the coming year we can expect the profile of UC to rise again, with the pace of rollout upped to 50 jobcentres a month and more people moving onto the scheme. Eventually around seven million families will be on UC, including half of all families with children – but we learnt last week that the full rollout to get to that point is now not expected to be complete until the early years of the next parliament.

The story so far has been one of delays and teething problems. But as we’re still at the halfway stage of the rollout, now is a good time to focus on the policy aims of UC, and the benefits of this huge benefit reform. This is what the government’s newly updated business case sets out to do.

A key aim of UC is to significantly boost the financial return for people to either work, or work more. The government estimates that an extra 110,000 people could be in work under UC, compared to the current regime. Obviously such estimates are very hard to make and we should not focus too much on the specific number, but we can at least note the relative scale and direction of change.

It’s obviously positive, though at the bottom end of the 100,000 to 300,000 boost previously estimated back in 2012. It’s worth noting, however, that record employment means that there are fewer out-of-work people to be incentivised into work, reducing the potential employment gains from UC. But while UC is likely to play less of a role in securing high employment, that doesn’t make the point of the benefit reforms redundant. UC isn’t just about getting people into work, it’s also about encouraging people to work more.

In that context it’s noteworthy that close to two-thirds of the estimated employment gains due to financial incentives in UC are at under 16 hours of work. As we’ve previously warned, one of the risks in the current design of UC is that it risks trapping people in short-hours, low paid work with some groups, particularly single parents, likely to reduce their hours under UC

Looking at the whole population expected to be on UC, the business case does anticipate incentives will help to boost hours, with people already in work amassing 113 million extra hours a year. But let’s not get carried away – averaged across all workers on UC this amounts to an extra half an hour a week per worker. We should also bear in mind that the impact will vary for different groups, some may work more hours, some may work fewer hours, and how large that change in hours is will vary too.

Even if you take the business case claims of an employment and hours boost at face value, the current gains from UC appear quite weak. But that needn’t be the case, and with the number of families on UC still under a million, there is still time to reform the reforms.

The problem with UC is that it is setup to solve a problem that has largely been solved – worklessness. This is a fantastic ‘problem’ for a government to have. But as old challenges recede, new challenges emerge and UC needs to be refocused to better support working families to boost their earnings.

A quick win would be stronger financial incentives (via increasing work allowances) for second earners – the group expected to see the lowest employment gains from UC. Traditionally, we might think of this group as mums with a working partner and young children. Increasingly though the lower earning partner may be the dad – reflecting a tougher labour market for young men. UC needs to adapt to meet this challenge.

UC also needs a greater focus on progression for existing workers.

Although the UK may not have an employment problem, it does have a big issue with low pay – particularly the fact that just one in six workers are able to permanently escape from it over a decade. UC can play an important role improving the financial incentive to earn more (for example by reducing the 63 per cent taper) and providing the right types of practical support for those who have been stuck in low pay (for example through upskilling or moving jobs).

There are already plans to engage with up to a million people in working families on Universal Credit through in-work conditionality. It’s a big test yet to come but the poor reputation of the current conditionality regime should give the DWP much pause for thought. Key is finding the appropriate balance between incentives, support and conditions – whether people are in-work or not.

Looking beyond work incentives, the other big cause for concern is the impact that UC will have on household incomes. The business case suggests that UC will save the exchequer £3.6 billion a year. The savings are a mix of spending reductions from more people in work and working longer (£1.9bn), reduced fraud and error (£1.3bn) and moving towards a monthly assessment of entitlement. But that leaves around £1bn of savings from the reduced generosity of UC.  It’s this direct living standards hit to families that is likely to be the most problematic for UC going forward.

The reduced generosity of UC will become a live issue from next year, when we move on to the final implementation stage – moving people with existing claims from Tax Credits (and other legacy benefits) and onto Universal Credit. To ensure that this transition does not lead to families receiving less support immediately – the cliff-edge that did for George Osborne’s tax credit cuts – UC will include a Transitional Protection regime. The design and implementation of this scheme will be debated in parliament this Autumn and are likely to be the highest profile element of Universal Credit this year.

It’s critical – both for the reputation of UC and the living standards of those affected – that these top-ups for families, who will otherwise find themselves worse off when they move onto UC, do not fail the many working families with children they aim to help. The government made an important pre-emptive move this week by setting out more generous treatment that helps protect the most vulnerable (qualifying for Severe Disability Premium) and prevents perverse results (like someone losing protection because they work more and pay more in childcare). We await details on where the funding for this extra support will come from, though it’ll be small fry compared to some of the spending commitments currently being discussed.

One effect of those changes is a further extension to the UC timetable – which DWP estimates to be until March 2023 at the earliest (the OBR tend to add a further six months for contingency). Significantly that is into the next parliament and will mark the 10 year anniversary of its initial implementation back in April 2013. Frustrating as the pace may be, getting these reforms right is far more important than meeting a specific deadline.

Taking a pro-active approach to tackling potential issues before they arise (as we predict for the self-employed and parents paying for childcare) will help the new benefit system land in a far more positive way. Restoring the generosity of the scheme would ease concerns about how the transition from Tax Credits to Universal Credit will play out. More fundamentally, shifting policy focus to better support low earning families – financially and practically – would make it better suited to tackle future challenges in the UK labour market, rather than problems of the past that have largely been solved.

This year is set to be an important one for Universal Credit. But the jury is out on whether it will be a successful one. The proposed pace of the rollout means that all types of new claims, including working families, across the whole of the UK could be in Universal Credit by the end of the year. This should focus minds in the DWP that the window for reforming the reforms before UC goes mainstream is closing fast.