Credit where it’s due? How to reform and make the most out of Universal Credit

There are some issues where a little bit of knowledge, and a lot of bluster, are all that’s needed for a politician – whether government or opposition – to get through a standard media grilling.

Universal Credit (UC), the government’s flagship and troubled welfare reform that integrates six separate welfare benefits, is a case in point.  Its champions speak of its near mystical power in tackling all manner of social ills from child poverty to unemployment. Ranked against them are those who invoke woeful IT contracting and the snail-like progress of the policy’s roll-out, as if no more needs to be said to prove that the whole idea is futile. Media understanding of the underlying policy is in most instances limited, meaning hard questions about it are few and far between. This permits the continuation of a dangerous myth: that the problems facing UC are all about delivery, not design.

Given that Universal Credit accounts for £70bn of public spending, and eight million households will be eligible for it – including half of all families with children in the UK – this absence of public scrutiny of the policy choices is inexcusable. Little is known about who will win or lose, if the right cluster of benefits is being rolled together or whether the entire enterprise will help tackle the labour market problems of tomorrow rather than yesterday.

Answering all this requires a forensic look under the bonnet of UC to ascertain how the byzantine changes it entails will reshape work incentives for different groups. That’s the task a group of the UK’s leading welfare and labour market experts, convened by the Resolution Foundation and chaired by Nick Timmins (the eminent historian of the welfare state), have undertaken. Its conclusion, published today, is that while Universal Credit shouldn’t be ditched it needs a major overhaul if it is to fulfil its promise.

The rationale for bringing together working-age benefits is an honourable one, and has been considered by Labour politicians as well as the current Secretary of State. It stems from serious flaws in the existing system of tax credits and benefits, where overlapping means-tests make it hard for claimants to figure out how much better off they are by working; not to mention the multiple (and burdensome) application processes that result in low take-up rates.

The real problem with UC stems not from this understandable desire to integrate benefits, but from its narrow view of the social problem that benefit integration could be used to fix. At root, UC is a policy shaped by the view that the towering problem facing the UK today is mass worklessness; it has fragments of ‘Broken Britain’ in its DNA. Yet, as RF research showed last week, worklessness among non-disabled couples with children has plummeted over the last fifteen years. As things stand UC will end up being a missed opportunity to make in-roads into one of the real social-ills of our time: in-work poverty and the low pay trap.

It’s these origins that lead UC to greatly prioritise the ‘main earner’ in a household (still typically the man) resulting in weak incentives for ‘second earners’ (no prizes for guessing who they are). To illustrate: a part-time second earner with an annual salary of £10,600 will see their disposable income rise by just £3,600 under UC; under the current system of tax credits it would rise by £6,000.  That’s a big reduction in the incentive to work even compared to a status quo which itself is hardly great. Add in childcare costs and it looks far worse.

It’s also the case that in its laudable desire to make it attractive to work even a few hours a week, Universal Credit has created a new and important risk: that ‘mini jobs’ increasingly become a resting place in the jobs market, rather than a stepping stone. A single parent who rents and gets paid the minimum wage will see their effective tax rate leap from 0% to 65% after 9 hours of work. Don’t be surprised if we see a rise of jobs reflecting these hours (just as we do 16 hour contracts at the moment), nor if some people who are already in work start to slide down the hours scale (at the tax payers’ expense).

Worse still, the proposed remedy against this risk of low-hours working is to dramatically expand the scope of benefit conditionality, including the sanctions regime, to those earning less than a full-time minimum wage salary. The message: get a pay-rise, or more shifts, or face the consequences. Let’s just say that there is little about the use of the sanctions regime in the last parliament that should make us feel sanguine about this prospect.

The redesign proposed by our groups of experts would strike a better balance in key respects. For starters, between the genders, providing more even incentives for both earners in a household to work and earn more, as well as extra childcare support. It would also combine encouragement to get more people into work – even on very low hours – with measures to minimise the risk that they get stuck in this type of work over the long-term. And it would better integrate Universal Credit with other key benefits, like Council Tax Support, the exclusion of which was one of the more asinine decisions of the last parliament.

The result would be stronger incentives to work, and earn, more for millions of families with children. It would halve the proportion of earnings that is clawed back (in tax and lost-benefits) from a single parent when taking a part-time job; just as it would for a second earner taking a full-time job. These are big shifts.

An immediate cash boost to low and modest income working families with children would follow.  But the real gains would arise from the impact on jobs. This is always hard to predict (treat all claims about employment impacts, whether from DWP or indeed the Resolution Foundation, with caution) but we estimate that our proposals would generate an employment boost of somewhere between 180,000 and 460,000.

The proposals in the report are cost neutral in this Parliament and assume, as the OBR does, that welfare spending rises in line with GDP in the next one. They won’t solve, nor add to, the £12bn ‘welfare cuts’ problem that George Osborne faces; but there is no solution to that which protects the most disadvantaged at the same time as improving the incentive to work. Nor do they magic away the very real implementation issues that any version of UC will have to grapple with.

What they do offer, however, is a fully-costed and radically improved version of Universal Credit that is in tune with social trends and speaks directly to today’s social evils. You might even call it a one-nation agenda.