The Independent View: Universal Credit..will it work?

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 Home owners, for example, see the support they receive with mortgage interest payments withdrawn as soon as they earn any income, while those families who receive free school meals still do not know at which income point their eligibility will cease.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.

The Independent View‘ is a slot on Lib Dem Voice which allows those from beyond the party to contribute to debates we believe are of interest to LDV’s readers. Please email [email protected] if you are interested in contributing.

* Alison Garnham is Chief Executive of Child Poverty Action Group.

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21 Comments

  • Good article.

    I’d only disagree with the spin in the penultimate paragraph: “new complexities such as online claims” hardly outweigh the simplification of merging multiple benefits into one; and the households that lose out are the richest benefit recipients, while those on lower incomes are much better off.

    LDs should consider:
    - a separate disregard for second earners, as you suggest
    - whether council tax benefit (or whatever it should be called now) should be incorporated too (perhaps taking some financial pressure off councils in the process)
    - whether we’d prefer to increase the level of UC, the disregard, or the taper rate – or some mix, or none
    - how this fits in with increasing the personal allowance – a tax cut which is 65% withdrawn from these poorer households

    Members should also consider the similarities between UC and the idea of a Citizen’s Income/Dividend (albeit conditional and tapered away – though that’s not so different from taxing it away).

  • The in work conditionalities incorporated in UC will see low paid and part time workers hounded by the job centres and sanctioned if not deemed doing enough to find more work. Families will no longer be assessed as a unit but as individuals with the main carer having to work part time when youngest child is five and full time when youngest child is twelve or face sanctions. The private companies will no doubt be paid bonuses for withdrawing benefit and the figures will appear to show that people are not claiming because ‘work pays’. This along with Duncan Smith’s other pronouncements will be a lie. Create the work and the jobs first and stop the appalling Workfare, If there are jobs for benefit claimants then these should be offered to them as paid employment not used as cheap labour fodder for unscrupulous employers.

  • David Allen 10th May '13 - 1:49pm

    “the effectiveness of the new benefit is undermined by … the Treasury’s reluctance to fully fund the project”

    I would suggest that the effectiveness of the new benefit is seriously undermined by the Treasury’s inability to discover the magic money tree.

    Let’s suppose, because it’s broadly true, that there is a fixed limit to the amount of money, in total, that the nation is willing to spend on benefits. Try to spend more than that, and the economy tanks, while the Daily Mail successfully ramps up its rant about how dreadful all benefits are. So there is a limit, which the Treasury are duty bound to enforce.

    We can then debate how to distribute that finite cake.

    Old “discredited” welfare policy was to pay a livable income to those who would otherwise starve, and stop there. No point in paying state benefits to people who could cope without them. That saved a lot of money.

    Duncan Smith thinks he has blown this out of the water because it caused the terrible so-called poverty trap which could be represented as a marginal tax rate of 100%, and it removed the financial incentive to work. To combat these supposedly unacceptable problems, IDS will now pay much more money to far more people with far lesser needs.

    It follows, because the cake is finite, that far less money must go to those who are worst off, who really need it. That is why we have ATOS to penalise the disabled, why we have a cap on JSA, why UC has many losers as well as many gainers.

    Dare we argue that UC is a big step backward, not forward? That given a finite cake to distribute, it is better to use it to prevent starvation than to “incentivise work”?

  • “Beyond its inherent but remediable flaws …”

    How can something be inherent but remediable? Surely if something is inherent in a system, the only way you can remedy it is by scrapping the whole system.

  • The report claims that there are lots of losers under UC. However it does not give examples for how this happens. I had expected them to be at the higher income levels and this is not the case. The idea that everyone will be better off in work than on benefits is a good idea but UC does not appear to deliver this. I always thought it wouldn’t because at some point there would be a cut off and I think the public agrees there should be such a cut off.

    The Council Tax Benefit reform hits the poorest most as it is likely they will have to pay something towards their Council Tax while under the old system they paid nothing. So we should ensure we will sort this out if in government after the next general election.

    The report identifies that there should be a second earner disregard and we should also promise to add this, even if at a reduced rate. We should recognise that there are costs to get to work.

    The non-payment of mortgage interest under UC for those in work just reflects that there is no help for them now and we shouldn’t promise to change this.

    The major problem with UC is that it subsidies wages and if wages were higher, less UC would have to be paid. We need to have a policy to increase the minimum wage above the rate of inflation and I would like to see it rise above the increase in wages if higher.

    I disagree with the new sanctions and hopefully as liberals we would consider relaxing them. We should also restore the old hardship payment scheme which from the report seems to have been a better safety net than the new scheme.

  • Some very valid points made in this article and some insightfult comments on the issues raised.

    We need to take great care with benefit changes at a time when we are seeing an ever-tightening squeeze on the living standards and increasing poverty levels of those with incomes below £10,000 per year. Work incentives need to be tailored to the economic conditions that include 900,000 people out of work for a year or more and a level of youth employment that remains stubbornly stuck at close to 1 million.

    In particular we should be addressing the continuing disincentives associated with the relatively high level of marginal withdrawal of benefits at 65%. and the failure of the ATOS work capability assessment regime to adequately cope with the most vulnerable, particularly those suffering from mental health issues, intermittent health issues and people damaged by long-term drug or alcohol abuse. I would like to see the benefit taper capped at a marginal rate of 50% of incremental after-tax income. We should alo be looking to conduct ATOS examinations at GP surgeries with family doctors present to co-sign work capability assessments and fitness for placement with job guarantee scheme.

    Programmes to tackle unemployment and poverty should be focused on ensuring that paid work opportunities exist and be coordinated with the tax and welfare systems to maximum effect.

    Adam Comments “members should also consider the similarities between UC and the idea of a Citizen’s Income/Dividend”. I agree and would like to see Libdems proposing to replace the £10,000 personal tax allowance and £7,755 lower national insurance threshold with earnings indexed tax credit of £3200 per year to supplement the earnings of the lowest paid; and replace the existing Job seekers allowance, employment support allowance, income support, working tax credit, child credit and child benefits with a non-means tested Citizens Income. It should be available to all long-term residents and equivalent to the earnings indexed tax credit of £3200 per year paid to those in employment (£1600 per child).

    Anne comments “Create the work and the jobs first and stop the appalling Workfare, If there are jobs for benefit claimants then these should be offered to them as paid employment not used as cheap labour fodder for unscrupulous employers.” I agree. Libdems should be working with local authorities, charities and the social enterprise sector to introduce an effective minimum wage Job guarantee scheme, available to all long-term residents, to bring an end to widespread involuntary unemployment. As an enabling carrot, the Job guarantee scheme should incorporate comprehensive child-care support for participants including both nursery and school breakfast clubs. The stick is eligibility for housing benefit and social housing tenancies could then be restricted to the retired, disabled/incapacitated and those in employment including participants in the job guarantee scheme.

  • Thanks for this Alison. I agree the system should instead be designed to achieve the positive engagement of claimants rather than punitive measures, and with Anne’s concerns.

    The USA looked like a great country, and then Bush got elected and it very quickly looked like a vile and ugly place that was nasty to the people.

    Unfortunately the UK seems to be importing some of its stupid policies.
    Workfare – why?
    Sanctions – No.

    After initial interest in the citizen’s income, it now seems like a bad idea, as under UC it is effectively a subsidy for overpriced housing and inadequate, perhaps exploitative wages. Pay people properly and provide decent housing at adequate prices instead.

    We need to retain the concept of social security as an insurance system against unemployment, disability, old age and in childhood, and reduce to a minimum the extent to which it is needed as a top-up for wages.

    Joe I don’t agree with your “minimum wage workfare” either. People should be paid a fair wage at the going rate for the job. The onus is on the employer to make the job appealing enough for a person to want to do it.

  • CP,

    “I don’t agree with your “minimum wage workfare” either. People should be paid a fair wage at the going rate for the job. The onus is on the employer to make the job appealing enough for a person to want to do it.”

    The Job guarantee is designed to do just that. By restricting employment subsidies to local authorities and the not-for-profit sector, private sector employers need to attract workers with a living wage and better hours/conditions than the minimum level established by the work guarantee program.

    This article discusses the basic design of a program for the US The Job Guarantee: A Government Plan for Full Employment and notes “employers will recruit workers out of the program; in a slump the safety net will allow those who lost their jobs to preserve good habits, keeping them work-ready. It will also help those unable to obtain work outside the program enhance their employability through training”

  • @Alison Garnham
    “true that capital rules at least will hit the richer in wealth terms, but it is a disincentive to saving (e.g. for mortgage deposit, or kids college fees)”

    There is no upfront payment for “kids college fees”. Students take out a student loan to cover the cost of their fees and then start to pay it back only once they are earning above the repayment threshold.

  • I also agree that we should not penalise saving in this punitive manner.
    In a more unstable, risky, precarious environment (which the welfare changes create, with conditionality, sanctions, means testing, and reduced support) it is even more important for people to save up to protect themselves.

    If people have small children, if they are saving up a deposit for a house, if they want to start a business, etc, savings are important – and profits and earnings are already subject to tax.

    Joe, I appreciate the good intentions behind the idea. I count local authorities and non-profit enterprises as employers too. Some people build their careers in these areas and they are sectors with highly skilled people, with an important role in our communities. In essence, we need to solve the problem with real jobs, not “make-work” schemes.

  • @Mark Inskip: Loans, especially under the current system, are really bad for the economy and cost everyone more, and the support for postgraduate study is almost non-existent. To suggest that we should discourage people from saving for their children’s education is crazy.

    @Alison, I agree this system, like the one before, but only worse, actively discourages saving,which is concerning.

  • @Liberal Al
    I am disappointed that you have chosen to misrepresent my comment and to turn it into political point scoring.

    My comment was merely intended to correct a misunderstanding that Alison and many others have that upfront payments have to be made for university tuition fees. This misunderstanding risks unnecessarily deterring young people from pursuing a university education.

    I have no objection to people saving to pay for their children’s education. Though I would prefer the state education to be so good that such an option becomes unattractive.

  • CP,

    the author of this article makes a fair point when she says “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.”

    The economist article Generation jobless writes:

    “it is not enough simply to embrace the German model of training and apprenticeships: you need to update it. Some policymakers want to transform unemployment systems from safety nets into spring boards, providing retraining and job placement. The Nordic countries have been to the fore in this, introducing “youth guarantees”—personalised plans to provide every young person with training or a job. When Germany liberalised its labour market in 2003-05 it also created new ways of getting people back into jobs. For example, to make someone who has been out of work for a long stretch more employable, the state will pay a big chunk of his wages for the first two years of a new job.”

    Job guarantees are desgned to underpin demand . a necessary element to the job creation in the private sector that both reduces the number of peole in subsidised job programs. and the overall level of unrmployment benefit support.

    I think we need an integrated or holistic economic approach that factors in wage demand in the economy, both cyclical and structural unemployment, work and skills training and vocational education as well as integration of the tax and benefit system with transitionl work programs.

    There are no end of jobs that need doing in the charitable and social enterprise sectors and no shortage of people capable of doing them. An enlightened administration would recognise the benefits for society, the unemployed and the economy as a whole in facilitating the process of engaging willing and able workers as a means of stimulating economic activity and working our way out of a slump.

  • Would it be possible for Nick Clegg to arrange a minutes silence at the start of this weeks PMQ’s for Stephanie Bottrill who committed suicide because she couldn’t pay the ‘Spare bedroom subsidy’?

    I Didn’t use the words ‘bedroom tax’ as it seems to upset coalition members of parliament?

  • Leekliberal 12th May '13 - 7:43pm

    Martin says’ I Didn’t use the words ‘bedroom tax’ as it seems to upset coalition members of parliament?’ You could choose not use the words because they are a perversion of english language usage. You pay tax out on your income and this is a reduction in housing subsidy. Gettit? Any suicide is a human tragedy but if you are sure what you say is true then you must be in touch with the almighty. Every action taken in Government has a negative consquence somewhere . All one can hope to do is improve things in general ie the underusage of social housing. Yours is a council of despair.

  • Negative consequence? Surely you mean positive consequence? Now there is an empty three bedroom property available and it didn’t even require the use of a one bed property.

    A win win situation all round.

  • Eddie Sammon 12th May '13 - 11:19pm

    I was saddened to hear the news however I do not think it will influence government policy. The government ministers had a good idea of the damage it would cause but seemed to be happy to go ahead anyway.

    We spend 20 billion a year on capital allowances, which are wholly unnecessary. However the government ministers have an attitude of taxing “bads” and subsidising “goods”, which just leads to a transfer of money from poor to rich.

    The government should not have cut subsidence level welfare and at the same time increased corporate welfare. I feel Nick’s heart is in the right place but I disagree with his logic.

  • But on a lighter note I do believe Chris Huhne gets out of prison in a few hours, so everything is all right with the world.

    Lol.

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