Some time ago Lord Freud (Minister for Welfare) published an article in the Huffington Post extolling Universal Credit as a benefits system we can be proud of an should embrace. This is a quick critique of what he said.
“Universal Credit will be with us next year. There have been questions raised lately and it’s worth being clear about where we are, when it will come in, and how it will impact on people.
We are rolling out Universal Credit in Greater Manchester and Cheshire regions in April next year – six months before the start of the national roll-out in October. This is the start of a four-year process that will see eight million households move on to Universal Credit and benefit from it.”
So far correct.
“Universal Credit will create a benefits system that will secure the safety net we are all proud of – with £2 billion a year more in benefits paid out and around 900,000 children and adults being lifted out of poverty – and ensure people are actively helped by the Welfare State into independence.”
The Institute for Fiscal Studies estimated that Universal Credit would, in the long run, cost £1.7 billion more than the current system of benefits. By ‘in the long run’ they mean that they are ignoring transitional protection. Transitional protection means that anyone currently on benefits who would be worse off with UC will receive the same amount as they currently receive, until a change in circumstances occurs. At that point payments will drop to UC levels. Including transitional protection, Universal Credit will cost £3.6 billion more, but this will not be the long-term cost as the number of people receiving transitional protection will decline over time as their circumstances change.
Lord Freud is therefore correct to say that UC will result in £2 billion more in payments under UC – as long as no other changes are made that would reduce welfare payments. This isn’t the case, but as long as UC and only UC is considered, then it is true that welfare payments will rise by £2 billion.
UC will reduce relative and absolute poverty. The IFS estimated that, without transitional protection, UC will result in 450 000 children and 600 000 working-age adults being taken out of relative poverty. The DWP estimated a lower number of children, which is why Lord Freud has given lower figures. But he is correct that UC will reduce poverty.
“Currently the system actively holds people back from getting into work and we have a duty to stop this.”
Jobseekers Allowance is £71 a week if you are 25 or over, or £56.25 if you are aged 16-24. If you are on JSA, then you can also get Housing Benefit and Council Tax benefit.
Housing Benefit has a maximum of £400 a month for four bedrooms, £340 for 3 bedrooms, £290 for two bedrooms and £250 for 1 bedroom or shared accommodation. Housing Benefit is available to those on low incomes as well as those on JSA. Child Benefit is paid regardless of other income or money received. Other benefits are tapered off as work income increases.
To see how work incentives occur, let’s consider one case – leaving aside any considerations of why someone on such low income is living in such an expensive area as I have assumed here. This person is single, over 35, has no children and works for minimum wage. He rents accommodation for £250 a week and pays £2000 a year in Council Tax. He has contracted out of the state second pension, is not paying into a private pension scheme and has no savings or assets. The person is also looking for more work. Because he has no children, he only receives Working Tax Credit once he is working for 30 or more hours a week.
|Housing Benefit||Council Tax||JSA or Working Tax Credit||wages||Total||Extra|
This case shows that there is some incentive to work for this person. If he went from no work to 30-40 hours of work, he would be £40-50 a week better off. An extra £40 can greatly increase the quality of housing that is affordable, or be enough to own a car, or have a holiday abroad.
Working less than 16 hours a week may not be worth the effort – it’s not even £10 extra. This may be a ‘passive’ holding back from work – I’m assuming that by ‘active’ Lord Freud means people who would be worse off working, rather than just not very much better off.
So how about a couple? This couple has no children, and the partner does not work.
|Housing Benefit||Council Tax||JSA or Working Tax Credit||wages||Total||Extra|
My couple now has two children under 20; one is over 10 and the other is under 10. Because one is over ten and they are of opposite sexes, they are entitled to separate bedrooms. This means rent can be up to £340, although I am assuming Council Tax remains at £2000. The partner is still not in work. No childcare costs are paid for these children. The family does not live in London. Nor does it live in Leicester, Bradford, Black Country, Edinburgh, Lothian and Borders or Cardiff and Vale.
|Housing Benefit||Council Tax||JSA or Working Tax Credit||Child Tax Credit||Wages (40 hrs is post tax)||Child Benefit||Total||Extra|
As you can see, there continues to be a ‘passive’ deterrent to work when paid work is at minimum wage and is part-time. Full-time work and work that is paid above minimum wage will generally be worth the effort.
There is an ‘active’ deterrent, but this occurs only in situations where a parent works between 16 and 24 hours a week. This is because the entitlement to JSA is lost at 16 hours, but Working Tax Credit for parents does not start until 24 hours a week. This is a change brought in by the current government from 6th April 2012; if they had not brought this in then there would not be any ‘active’ disincentives to work.
Lord Freud is largely incorrect to say that the system actively holds people back.
“By bringing together six major benefits, people will be able to manage their claims much more simply. The current risks people face by moving into work, and the fears they will be worse off, will go. Universal Credit will remove the barriers that we have under the current system where starting a job means switching from one set of benefits to another and informing councils, Jobcentre Plus and the HMRC. This mountain of paperwork alone is now enough to stop many people from moving into work. Under Universal Credit, claiming will be much simpler and the one benefit will stick with people as they move from unemployment and into work.”
Having looked at the different benefits and what UC replaces, I can agree that UC looks simpler, although it is not as simple as it could be. UC means that people need only apply to the DWP, and not also to the HMRC for tax credits. It means that only one benefit is applied for, rather than several – although passported benefits may not be that much effort anyway. UC means that there will be one tapering rate when a benefit recipient increases the number of hours worked, rather than the different rates that currently exist.
Paperwork in applying for benefits does put people off; whether this is important in terms of stopping people moving into work is questionable. I have no experience of moving off benefits into work so can’t comment. The government does however have a good website system for assessing what benefits a person is eligible for. I have used it above to work out the benefits for different scenarios. A person does not need to know the tapering rate of a benefit to be able to work out what benefits they will receive under a change in circumstances. Nor does a person need an understanding of maths, disregards and tapering rates as percentages of extra income.
“Many of the new rules under Universal Credit are designed to mimic work -whether that is self employed or paid employment – with much more accountability for both individuals and households.
For the small businesses where people also claim benefits, a requirement to do simple monthly reporting will help people keep a closer grip on their accounts and to budget effectively. In many cases it will also help people to grow their businesses. And in fact, I am working the Chartered Institute of Taxation to simplify the system for small businesses.”
These new rules include being paid monthly in arrears. What this fails to recognise is that many employers, especially at the low-end of the wage scale, pay weekly – only half of jobs paying £10 000 a year use monthly pay packets. Monthly payments only mimics higher end jobs. Additionally, it could leave people without money for a month whilst employers and the DWP catch up with changes in employment status such as job loss.
The government even seems to have recognised that some families may struggle to budget with monthly payments: “The Government is seeking providers who can supply products with extra budgeting functions to support claimants as they move to the new benefit Universal Credit.” Whilst this may well be very helpful for many clients, it is odd that the government first claims that monthly payments will ensure budget responsibility and then claims a need to spend £80-145 million on developing schemes to manage people’s budgets for them. This need was also picked up on by the thinktank Social Market Foundation in their report, “Sink or Swim,” although they encourage an opt-in approach by individuals rather than the government identifying those whom they deem vulnerable.
The government plans to make all benefit recipients report any income at the end of every month. But the Chartered Institute of Taxation has ruled that these extra burdens include deadlines that many businesses may be unable to meet. According to the CIT, “ rule preventing losses from one assessment period being carried forward to the next ‘shows fundamental misunderstanding of how businesses operate.’” These monthly transactions would be calculated using different methods and criteria from those determining self-employment. There seems to be little foundation for Freud’s comment that this will be helpful for small businesses. however, it is good to note that he is still in consultation with the Institute on this matter.
“Most importantly of all, under Universal Credit people will know they are better off in work than on benefits.”
Well, yes. But the same is true for the majority of people under the current system, and where it is not true it is because of changes made by this government to Tax Credit eligibility. So UC is only an improvement if the incentives to work (i.e., more money is kept) are greater than the current incentives. Work incentives are largely better under UC, but not always. They are better for:
- single, no children: up to 30 hours
- single, 2 children: up to 16 hours
- couple, no children: 2nd earner less than 10 hours
- couple, 2 children: always better off under UC
Work incentives under UC are the same as the current system for:
- single, no children: 40+ hrs
Work incentives under UC are worse than the current system for:
- single, no children: 30-39 hours
- single, 2 children: over 16 hours
- couple, no children: 2nd earner works over 10 hours
“We are working closely with Councils too as they introduce localised Council Tax support schemes. The speculation that these will undermine the work incentives in Universal Credit is misguided. It fails to take into account the increased earnings disregards in Universal Credit – the amount that someone can earn before their Universal Credit starts to be reduced.”
As far as I am aware, concerns that the new Council Tax system will undermine UC is not due to lack of consideration of the increased earnings disregard. As the above bullet-points show, UC does not uniformly improve work incentives. Nor does UC mean everyone wins. And UC tapers at 65%, which is higher than the taper rate for tax credits. The Institute for Fiscal Studies said that, “It is difficult to see how a localised form of CTB could work alongside Universal Credit without undermining the government’s aims of a simpler benefit system with more transparent and stronger incentives: a fully localised CTB could lead to a complicated and opaque benefit system, if the hundreds of authorities that currently administer CTB each have their own rules for its replacement; and giving local authorities the ability to determine the withdrawal rate of CTB (or its replacement) could undermine any strengthening of work incentives that might arise when Universal Credit is introduced.” There is no reason to believe that Lord Freud is correct in saying that increased earnings disregards will be sufficient to counter any negative effects of localised CTB.
“As well as helping people to move into work, Universal Credit will get people online and closer to the jobs market. Independent research carried out by Ipsos Mori, reveals that 78 per cent of working age benefit claimants say they use the internet already – clearly demonstrating that being online is suitable for most claimants. However, we recognise that not everyone is ready to use online services and we are making sure that there will still be face-to-face and telephone support in place for those who need it.
We are working now with councils across Britain to have this support in place – and to ensure the skills people gain from learning to claim online also help them to look for work online.”
Whilst 78% use Internet, 10% of these (7.8% of the total) did not use it at home, meaning that overall 30% did not have internet access at home. People on JSA were particularly likely to not have access to internet where they lived.
But the information that matters most comes out later. People were asked about their use of technology, specifically using self-service tills and various uses of the internet. At best, only 51% of respondents used and were happy to continue using internet for searching for jobs online, and a further 10% had never done so but would like to try. The possible negative responses were ‘I have done this but am not interested in doing it again’ and ‘Never done and not interested/doesn’t apply to me/never use service. For using the internet for social network sites, 47% selected one of these responses. For online shopping it was 47%; online banking was 51%; finding out about government services, such as entitlement to benefits, was 43%; and claiming benefits online was 58%.
Only 14% of people had previously used the internet to make a claim for benefits. Only 43% had ever used the internet to find out about government services.
So the majority have not used the internet to access benefits, despite this being the recommended route, and the majority do not want to claim benefits online; 43% also do not wish to find out about benefits online.
These figures were for ‘main claimants’, defined as the member of the household that receives the largest amount of benefits. When all claimants are considered, 62% responded positively when asked if they would be willing to make an application for a benefit or Tax Credit online. 45% said they would need help or support. Reasons against online use included lack of skills (32% of respondents) and low literacy (9%), fear of making a mistake (21%) and cost (13% cited cost of computer, 10% cited cost of internet).
Evidence submitted to the DWP by the Centre for Economic and Social Inclusion suggests even worse figures: “Universal Credit will also serve to reduce the channels through which individuals can claim benefit. As the draft regulations make clear, online claiming will be the only option available to claimants unless they fall “within a class of case for which the Secretary of State accepts telephone claims or where he is otherwise willing to do so.” On the latest data just 19.6% of new JSA claims were made online, while ONS figures show that almost a quarter of households have no internet access and that the rate of internet use decreases in line with income.”
Overall, these are not figures that suggest an on-line service of benefits is something that will work well or easily for benefit claimants.
“Our IT programme for Universal Credit is on time and, in fact, and is already being tested by claimants. Rather than a big bang approach we will be rolling out Universal Credit gradually. Nor are not starting from scratch, we are using existing IT systems and building the extra capacity and capability as we need it.”
But BBC News quoted Labour’s Shadow Work and Pensions Secretary Liam Byrne as saying, “Universal Credit is overdue and over budget and now everyone from the chancellor to charities, the CBI to local councils is warning this is a car-crash about to happen. We’ve been warning of this for months and we’re summoning Iain Duncan Smith to the Commons for a full scale debate.” Liam Bryne led an opposition day debate on this topic. He has said that UC is £100 million over budget, nine months late and in danger of becoming a car crash. Leaked documents showed that part of the welfare reform – real time information on finances – has been rated as having significant risk of failure.
“We are working with other Government departments, councils, housing associations and community groups across the country to prepare people for the change. We will even establish a hotline for MPs as the benefit comes in to answer their questions.”
Well, I hope they are, although DPAC might point out that the DWP sometimes claims to be in discussion with groups with whom it has not had any discussions.
“Universal Credit is about to become a part of the lives of millions of people across Britain. It will simplify their benefits and ensure their path into work is much easier and clearer. I want everyone to embrace that.”
It is unclear if UC will make paths into work easier and clearer. Until it is shown that UC is a success, I have no intention of embracing it as such.
 Freud, 4th October 2012, Universal Credit will create a benefits system we are all proud of, Huffington Post. http://www.huffingtonpost.co.uk/lord-freud/universal-credit-lord-freud_b_1935413.html?utm_hp_ref=tw
 Brewer, Browne and Joyce, 2011, Child and working-age poverty from 2010 to 2020. Institute for Fiscal Studies.
 If a couple has children, together they must work at least 24 hours and one of them must work at least 16 hours. In this hypothetical example, only one adult works so this adult must work 24 hours.
 Sink or Swim, Social Market Foundation
 ibid., IFS Brewer, Browne and Wenchao, 2011, Universal Credit: A Preliminary Analysis. Institute for Fiscal Studies
 Freud, 17th September 2012 New financial products to help Universal Credit claimants manage their money, DWP http://www.dwp.gov.uk/newsroom/press-releases/2012/sep-2012/dwp102-12.shtml
 Brewer, Browne and Wenchao, 2011, Universal Credit: A Preliminary Analysis. Institute for Fiscal Studies
 Tu and Ginnis, 2012, Work and the welfare system: a survey of benefits and tax credits recipients. Ipsos Mori All figures in this section come from this report.
 Office of National Statistics (2012) Internet Access Quarterly Update, 2012 Q1 , 16 May 2012
 Kirkup, 9th Apr 2012, Tax reform project running into trouble, say experts. Telegraph. http://www.telegraph.co.uk/news/politics/conservative/9194620/Tax-reform-project-running-into-trouble-say-experts.html