As the first pathfinder for the new Universal Credit system began in April, David Cameron tweeted: "Another major step forward on welfare reform today with the introduction of Universal Credit – this Govt is determined to make work pay".
But this goal risks being undermined by the high cost of childcare in the UK. For some families this is the difference between work paying and paying to work. New research published by the Joseph Rowntree Foundation shows that when the cost of childcare is factored in, for some parents in low-paid jobs it no longer pays to work full-time, while for others the incentive to work more hours is blunted significantly.
Take for example a couple with two young children, where the father is already working full-time on the minimum wage. If the mother takes up a minimum wage job of one and a half days a week, the family would be £23 a week better off. If she increased her hours to three days a week, they would only be £8 a week better off than when worked half the hours. And if she worked full-time the family would actually be worse off than when she worked fewer hours. In this scenario, the family’s disposable income does not increase significantly for three reasons.
First, the amount of Universal Credit received by the family is sharply withdrawn as the mothers earnings increase; second, by working more than 30 hours she is brought into income tax; and third, the more hours she works the more childcare the family needs. The cost of childcare has risen at twice the rate of inflation over the last five years, while at the same time the help with childcare costs offered to low income working families through the welfare system has been sharply reduced by this government.
But there is some relief on the horizon. In the 2013 Budget, the government announced something of a reversal, proposing to provide more help with childcare costs to working families receiving Universal Credit. But – and it’s a big but – to be eligible all adults in the household would have to be paying income tax. This would exclude those households where someone is working part-time earning the minimum wage. Looking at the working patterns of low income households at present, this policy would deliver a welcome boost to some 600,000 working families on low incomes – but 900,000 in low paid work would miss out.
The government has said it will publish a consultation on its childcare plans before parliament breaks up for its summer recess (next week). To ensure Universal Credit delivers on its goal of making sure it always pays to work, the policy needs to include something for those families that are working hard and 'doing the right thing' but not yet earning enough to pay tax. Otherwise a large number of families will remain trapped in a situation where it barely pays to work.
Katie Schmuecker is policy and research manager at the Joseph Rowntree Foundation