The importance of getting the incentives right for Universal Credit

Despite parties gearing up for the next election and the chancellor already placing further spending cuts to welfare firmly on the table, attention has moved away from the expected impact of Universal Credit on families, and has instead turned to the implementation issues that have dogged it so far.

Cuts in welfare spending have already made Universal Credit less generous than originally envisaged and it is unclear what the impact of Universal Credit will be when it does arrive.

As a paper published today by Resolution Foundation argues, simplification of the benefit system is certainly a positive step. Universal Credit is a radical and big bang approach to dealing with the often confusing complexities of the current benefit system. A single benefit will ease the process of moving into work by removing the need to claim different benefits.

Financial rewards to start work are improved through work allowances (effectively earnings disregards) which mean that the initial earnings of a household, up to 20 hours of work at the minimum wage for a couple with children, are kept before any benefits are withdrawn.  Once earnings go beyond this point UC is withdrawn at a single rate of 65p for every additional pound of earnings.

But this new incentive structure creates its own problems. For some, particularly those claiming support with their housing costs, the point at which this allowance runs out is much lower, for a couple with children claiming support with housing costs it is equivalent to working eight hours at minimum wage.

A new regime of in-work conditionality is expected to counter the risk that people who now find it more worthwhile to enter work at a low number of hours get stuck in those jobs. People will be expected to be earning the equivalent of 35 hours at minimum wage or risk having their Universal Credit award reduced.

But the radical nature of this system should not be underestimated.  Little evidence exists to inform its design which is a huge departure from the current role of Jobcentre Plus. Yet the policy design is still not complete and it is unclear whether the default of an evolved Jobcentre Plus is the correct agency to deliver such support.

An opportunity is also created to go beyond simply encouraging people to work to a minimum level. Universal Credit has the potential to identify and support both working people who are struggling to progress out of low pay and people about to enter work who have the potential to do so at a higher wage.

The interaction of government agencies with a new incentive structure is just one of a number of issues that could undermine the undoubtedly beneficial aims of Universal Credit. It is important that due consideration is given to such issues to ensure that Universal Credit achieves its goals.

This blog was originally published on the Public Finance website