New Work and Pensions Secretary must reclaim Universal Credit from the Treasury

Resolution Foundation calls for major reforms as full roll-out of Universal Credit begins this month

A few weeks into his role, the new Work and Pensions Secretary has been urged to reclaim Universal Credit (UC) from the Treasury. The advice is contained in a major new report published today (Tuesday) by the Resolution Foundation which sets out a three-point plan for restoring UC’s original purpose of encouraging entry and progression in work.

The Foundation has long supported the introduction of UC, arguing that it has the potential to simplify the welfare system, boost work incentives and support living standards.

However, while welcoming the reassurance given by the incoming Work and Pensions Secretary that he will press ahead with it, the think tank says that recent changes to UC – which have been driven by the government’s desire to secure further savings in the welfare budget – have taken it too far from its original purpose.

The Foundation says that UC now has serious design flaws that must be resolved before the rollout is complete. It warns that unless changes are made, UC risks being reduced to little more than a very complicated vehicle for cutting the benefits bill.

The reform programme, which was first introduced in limited form in 2013, is entering a landmark phase. The roll-out of the full service begins this month, with claimants in Bath and Newcastle among the first to receive it. According to current government timetables, UC is expected to be fully rolled-out by the end of 2021, by which time almost half of all families with children will be entitled to it.

The Foundation’s report considers how the reform – viewed alongside plans to boost take home pay via the National Living Wage and increases in the Personal Tax Allowance – compares with the current system of tax credits and other benefits when it comes to the returns to entering and progressing in work.

It finds that in absolute terms the new system reduces the returns to work for many families. Around 2.5 million working households will be worse off by an average of £41 a week, while around 2 million households will be better off by an average of £34 a week. The new system particularly reduces work incentives for those who are most sensitive to such inducements including single parents and second earners in couples.

Recent reductions to work allowances – the amount claimants can earn before their benefits start to be withdrawn – have deepened the problem.

The report welcomes the fact that the very worse disincentives to enter work in the current system will be addressed. The analysis shows that under tax credits half of first earners in couples with children entering work at low-paid part-time hours would keep just 10 per cent of their post-tax earnings. Under UC, these disincentives have virtually been eliminated.

However the Foundation says that with worklessness in the UK already at a record low, encouraging first earners into part-time work is not the big labour market challenge the country faces today. Instead it says that with around two in every three poor children now living in working families, UC should focus on boosting incomes by encouraging entry into work among second earners and by supporting pay progression for all recipients.

The analysis shows however that the returns to entering work for second earners are far worse in UC than under the current tax credit system. Under UC, the majority of second earners will keep less than half of their earnings if they enter work at part-time hours, creating a risk that they choose not to work at all.

The report says that in order to make the most of UC, the new Secretary of State should reclaim the policy from the Treasury and follow a three-point plan:

• Focus on those most likely to respond to financial incentives to work. The report says that raising work allowances for single parents and second earners is the most effective way to boost employment.
• Offer more practical support to boost in-work progression. The report calls for a more radical focus on boosting claimants’ earnings, not the narrow focus of in-work conditionality on securing a full-time job on the wage floor. This task has taken on added importance with weak incentives and the introduction of the National Living Wage which, despite providing a welcome boost to earnings, will significantly increase the number of people on the wage floor.
• Address practical concerns about UC’s interaction with people’s lives. Despite merging six working-age benefits into one, UC retains lots of complexity. The Foundation argues that interactions with the system could be improved by allowing Housing Benefit to be paid directly to landlords and streamlining reporting requirements for the self-employed and parents with childcare costs.

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

“As Universal Credit begins the roll-out of its full service this month, now is the right time for the new Work and Pensions Secretary to take stock of progress to date. It is a reform with lots of potential, but it has veered off-track over recent years, particularly following a series of sharp cuts in support to working families.

“With UC’s main goal of making work pay now under serious threat, the Secretary of State should reclaim the project from the Treasury. Three steps are key.

“He should prioritise support on those most likely to respond such as single parents and second earners, ensure UC does more to help those already in work to progress, and iron out some of the practical concerns that have arisen during the initial pilots.”