Reboot of Universal Credit needed to meet welfare challenges of next decade

Far-reaching reforms of Universal Credit (UC) would help hundreds of thousands more people into work and bring significant cash benefits to working families with children, according to a new report published today (Monday) by the independent think-tank the Resolution Foundation.

Making it work – the final report of a nine-month review of Universal Credit led by a panel of experts – supports the core principles behind UC and rejects the view that UC shouldn’t proceed.

But the report says that far-reaching changes are needed to build on UC’s strengths, address its flaws, and equip it to meet the UK’s shifting labour market challenges. Its package of reforms is cost-neutral during the current parliament and in line with the OBR welfare spending projections thereafter.

The Foundation welcomes the stronger incentives to work in Universal Credit. These are delivered through ‘work allowances’ that allow people to retain their full benefit entitlement as they enter work and earn up to a certain level, particularly helping those only able to work a few hours a week.

But Making it work argues that a number of significant changes need to be made to Universal Credit if it is to fulfil its potential. For instance, a second earner with an annual salary of £10,600 will see their disposable income rise by just £3,600 in UC – where as in the current system of tax credits it would rise by far more (£6,000). The Foundation’s changes, which would disproportionately benefit women by helping many more into work, include:

• Introducing a new work allowance for second earners in families;
• Significantly increasing work allowances for single parents who rent; and
• Increasing childcare support for working parents with children under the age of three to 95 per cent of their childcare costs.

The Foundation also proposes a ‘triple lock’ to protect these important work incentives over time by uprating work allowances with whichever is highest of average earnings growth, increases in the minimum wage or CPI inflation.

With close to two-thirds of poor families already having someone in work, the report says that UC must do more to help people to escape low pay and get on in work. It calls for:

• A significant reduction in the UC taper rate to 55 per cent or less so that claimants can keep more of their income as their earnings rise;
• A guarantee that future tax cuts are passed on in full to over two million workers receiving UC, who currently stand to lose two-thirds of any gains from increases in the personal allowance; and
• An ambitious new approach towards helping low earners to progress, piloted with employers, rather than the current proposal to introduce ‘in-work conditionality’ that includes the threat of sanctions for workers who don’t earn enough.

The Foundation argues that to make the most of UC it is imperative that it integrates the right benefits. It proposes incorporating Council Tax Support into UC, which could reduce administration costs by up to £500m. These savings would be recycled to provide more support for low-income working age families.

The report also argues that making UC easier to use for claimants is as important as getting the incentives right. It proposes making the system more user-friendly and reducing bureaucracy by:

• Relaxing the monthly reporting requirements for parents with childcare costs and the self-employed, helping to ensure they receive the maximum support available;
• Offering UC recipients flexibility over the timing of their benefit payments ; and
• Making it easier for tenants to have their housing benefit paid direct to landlords.

Together, the report argues that over the next decade its package of reforms would help between 180,000 to 460,000 more people into work compared to the current system, potentially doubling the employment gains currently projected for UC.

The reforms are a major advance in making work pay – halving the proportion of an individual’s earnings that is clawed back by the state (via tax and a reduction in benefit entitlement) when single parents enter work at part-time hours, and when second earners enter work at full-time hours.*

Working families with children are the biggest beneficiaries from the Foundation’s reforms, gaining between £5 and £20 a week compared to the current UC proposals. And with 80 per cent of the gains going towards the poorest half of households, the Foundation believes its proposals would play a significant role in reducing child poverty.

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

“Universal Credit holds many advantages over the current benefit system. But it hasn’t caught up with big changes in the UK’s labour market, such as rising in-work poverty.

“The government’s flagship welfare reform programme needs a reboot so that it can deal with the big labour market challenges of the next decade and beyond, such as helping people escape low pay, rather than try to tackle the problems of the past.”

Mike Brewer, Professor of Economics at the Institute for Social and Economic Research and panel member of the Review of Universal Credit, said:

“Universal Credit will encourage more people into work. But with further reforms it could help hundreds of thousands more.

“By focusing support where it will make the most difference – particularly second earners and single parents – a revamped UC will help many more women into employment, which in turn will boost household incomes and lift more children out of poverty.”

Nick Timmins, Chair of the Review of Universal Credit, said:

“The reforms set out in this review build on the existing strengths of Universal Credit, such as the simplicity that should be achieved by merging six benefits into one.

“But the current design of UC contains flaws and it also carries some risks – for example that some people might reduce their hours of work at the taxpayer’s expense. A new government provides the perfect opportunity to address such issues before millions of people are moved on to the new system.”

Ends

* In the example of a second earner who would keep just £3,600 of their first £10,600 earnings under the UC baseline, our proposals increase this to £7,000.

For more information contact:

Rob Holdsworth (Director of Communications) on 020 3372 2959 or 07921 236 972