On welfare reform, something is moving in the undergrowth. It’s called Universal Credit. The new benefit will amount to £53 billion by 2020-21, with almost half of families with children entitled to it. Only the State Pension will be bigger. Implementing this mammoth policy is the key task facing the new Secretary of State for Work and Pensions, Stephen Crabb. Getting it right matters, not just for the living standards of those receiving it, but for the healthy functioning of our labour market.
The new Secretary of State has inherited a UC design that is drastically different to that as first envisaged by the man he so recently replaced, Iain Duncan Smith. Most recently last Summer’s Budget included major cuts that kick in this week – significantly reducing how much a family can earn before they start to see their benefits reduced (via cuts to what is called the work allowance).
So where do these changes leave UC? It was designed to replace six existing benefits, including Jobseekers Allowance and Tax Credits, to deliver three objectives; to simplify the benefits system, to ease the entry into work, and to improve incentives to increase earnings by allowing families to keep more of each additional pound earned.
These are valuable objectives and now is a good time to take stock on what the version of UC that has been bequeathed to Stephen Crabb will deliver against each of them.
First, on simplification, design changes have largely protected the significant wins of a single benefit. Combining both in- and out-of-work benefits creates a big beast but one that will simplify things for people moving into work. It should also increase take-up by removing the need for families to apply for several different benefits. However there is further to go – Council Tax Support remains outside of UC and the government has still not explained how UC will interact with other entitlements like Free School Meals.
Second, on the incentive to enter work the original design of UC significantly improved things. It increased incentive to start work at short hours, which there is currently little reward for, and to take on some additional hours. For example a home owning single parent could work 22 hours on the wage floor before seeing their benefits reduced.
Those benefits have been serious undermined by the summer Budget. Most families will only be able to work up to a maximum of 10 hours before seeing their benefits start to reduce. For many working families this will mean work will pay less, on average £1,000 less.
Because cuts to UC have continued while similar cuts to tax credits have been scrapped, UC will now be less generous than the benefits it replaces. Where you are in the country will determine whether you are eligible for UC or the existing system – a post-code lottery on steroids. Take a low earning single parent working 16 hours a week at £9 an hour. Under tax credits their income will be £278 a week. Under UC they will be £29 a week worse off.
Third, on incentives to increase hours in work, the signature feature of UC is a single rate at which benefits are reduced as you earn more – capping the most punitive rates in the current system of multiple benefits. This has survived largely because Iain Duncan-Smith, before his departure, prioritised protecting it from the Treasury while accepting cuts to the Work Allowances.
That’s just as well because it is already too high. Families on UC will lose 65p of each additional pound they earn – rising to 76p if they pay Income Tax. If this was a tax rate people would not accept it. Because of it that single parent losing £29 a week would need to work another eleven hours a week just to recover those losses.
But the new risk with UC is not so much the weak incentives to earn more – that’s long been a feature of the benefits system – but the risk that people choose to work less. Under tax credits, the single parent mentioned above would have lost all of their working tax credit if they chose to work less than 16 hours a week. But under UC they could work 40 per cent less, down to 10 hours, and lose just £17 a week. We know from the tax credits experience that these incentives matter, especially for single parents and second earners.
This risk of short-hours working makes a hidden part of UC now crucial. For the first time in-work conditionality is being introduced so that Jobcentres maintain pressure on people to increase their hours once they are in work. What was once considered an untried experiment to aid progression has now become a vital requirement to counter these weakened financial incentives – and among working families unused to such a level of state intervention in their day-to-day lives.
So where does this leave us looking at the Parliament ahead? The administrative prize of a simpler system remains but in agreeing to changes to his flagship reform Iain Duncan-Smith seriously undermined some of the advantages the system was intended to bring – problems that Stephen Crabb will now have to wrestle with. He should make maintaining the returns to work for single parents and second earners in particular a top priority despite the cost pressures that might bring.
As UC is rolled out across the parliament there will be a visible postcode lottery of winners and losers. And amidst this jungle of changing entitlements and churn between schemes there is real risk that the success of UC now rests on the (totally untested) shoulders of an untried and untested in-work conditionality regime. For DWP and its new Secretary of State it’s going to be a busy few years.