Credit where it’s due? Assessing the benefits and risks of Universal Credit

Published on Tax and Welfare

The government’s plans for Universal Credit (UC) were first set out in November 2010, and its concept has received broad cross-party support. But the process of implementation has been dogged by a series of delays – the OBR now anticipates that it will not be fully rolled out until at least 2020, potentially 3 years later than originally planned – causing some to question whether the policy will ever be delivered.

The Resolution Foundation review – launched in 2014 – takes as its starting point the assessment that UC retains the scope to deliver significant benefits, but that its design requires careful reappraisal to ensure that it still meets the aims originally set out. The review brings together a highly regarded panel of experts to assess the design of UC and determine whether it will meet its key goals of simplifying the benefits system and providing stronger incentives to enter and progress in work. A final report will be published, with policy recommendations after the election.

This interim report sets out the challenges facing UC as identified by the review, and the areas most in need of attention. We present new analysis of the impact that UC will have on incomes and incentives to work, point towards potential risks and improvements, and draw out the key questions that will be addressed in the final report.

  • The introduction of UC will produce a complex mix of winners and losers – some inevitable (as with any such reform without significant extra funding), others the result of deliberate policy choices associated with the structure of the new system.
  • The clearest advantages flow from:
    • the integration of multiple benefits;
    • the simplification of recipients’ interactions with the system; and
    • the provision of regular, reliable payments.
  • These should smooth the transition into work and by themselves increase the number of people in employment. No longer having to claim for multiple benefits should increase take up of the support families are entitled to, potentially providing an important boost to income for low-income families.
  • In addition, work allowances will provide a clear and improved financial incentive to enter work. They will allow people to keep all of their benefits as they first start working and should encourage more people into employment. These are significant gains.
  • But, cuts in the generosity of UC, particularly to the work allowances, are set to persist in the next parliament and blunt these improved financial incentives to start work.
  • For some households UC will still be difficult to use: providing the system with information about childcare costs and self-employed income could be tricky, and this could undermine some of the benefits of the simplified integrated system.
  • The inclusion of housing benefit, withdrawn under one taper rate within UC reduces the very highest withdrawal rates that people face in the current system, with the additional gain  of providing a clearer indication of the return to working or earning more.
  • But in practice there often won’t be a single smooth taper. The system will continue to produce variable withdrawal rates for recipients through interactions with the tax system, support with childcare costs and other benefits such as council tax support and free-school meals.
  • UC is purported to improve work incentives, but its primary focus is on reducing worklessness within households. It does little to encourage increases in hours or earnings, beyond what the current system provides. Indeed, many will face slightly blunter incentives to work or earn more.
  • Uncertain outcomes and reactions to the introduction of UC among specific groups create a potential risk to the exchequer. In particular:
  • Workers without children and single parents with housing costs may have greater incentive to work fewer hours, with the taper cushioning a drop in earnings
  • Second earners face having already poor incentives made still weaker under UC, creating an increased risk that they choose not to work at all.
  • Assisting low paid recipients to progress in work will rest on a system of in-work conditionality, providing an opportunity for support – but we know very little about how effective it may be in dealing with these new risks.
  • Maximising the potential benefits of the major reform that is UC will mean both strengthening the positive impact of the work allowance and a simplified, better-integrated system, but also mitigating the risks posed by complex information requirements and weak incentives to progress.