When the first Universal Credit (UC) pilot was launched in Ashton-under-Lyne last week, much attention was paid to the practicalities of the new benefit, from the timetable to the IT system, the challenge of online claims to the problems with monthly payments. A new report published this week by Child Poverty Action Group and the TUC, however, considers the bigger question of whether UC can deliver on its broader objectives, and in particular on how the new benefit can truly ‘make work pay’.
UC relies on two key design features to deliver on this promise. First, it allows claimants who enter work to keep their entire UC award up to a certain income point (the ‘disregard‘). Second, once claimants earn more than this threshold, their benefit is reduced at a steady and predictable rate for every extra pound they earn (the ’taper’).
In both respects, UC represents a real improvement on the current system with its sharp cliff edges and opaque interactions between various benefits. But the effectiveness of the new benefit is undermined by both the Treasury’s reluctance to fully fund the project and the broader environmental conditions in which it has to operate.
Budget constraints have meant that corners have had to be cut throughout the UC design process. As a result, some UC claimants, most notably second earners in households, are entitled to no disregard and see their benefits affected as soon as they begin work. Perhaps even more critically, all claimants will see their awards tapered away rapidly, losing 65p of their UC award with every pound they earn after their disregard is exhausted, rather than the more generous 55p that the original UC proposal envisaged.
As a result, the spurs to work within UC are not as significant as perhaps the Department for Work and Pensions (DWP) would have liked. And these weak incentives are compounded still further by the many complicated rules that hedge UC entitlement. Home owners, for example, see the support they receive with mortgage interest payments withdrawn as soon as they earn any income, while those families who receive free school meals still do not know at which income point their eligibility will cease.
Beyond its inherent but remediable flaws, UC is being launched at a decidedly unpropitious point in the economic cycle. Work can only pay if claimants can find work and subsequently take on more hours. As the ONS figures show, our slow-moving economy is characterized by both underemployment and significant pockets of regional unemployment. For many, then, finding work or upping their hours is often determined by factors beyond both their, and the benefit system’s, control.
UC looks set to flounder with respect to its other objectives too. The new benefit is expected to simplify the system and while integrating in- and out-of work benefits does achieve this to some degree, the reality is that new complexities such as online claims and joint payments are also being introduced. Likewise, UC’s other avowed aim, to reduce poverty, is unlikely to be realised when the government’s own impact assessment shows that 2.8 million households will have lower entitlements than under the current system.
Many of the ways that UC could be improved are within DWP’s gift, but it is to the Treasury and not the Department that we truly need to look if the new benefit is to deliver on its objectives. Without additional funding to improve work incentives and smooth out cliff edges, UC will only make work pay for a limited number of people. And without an effective growth strategy, the jobs that are necessary to underpin UC’s success will simply not be there.
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* Alison Garnham is Chief Executive of Child Poverty Action Group.