What the think tanks are saying: The IFS on the Universal Credit

The Welfare Reform Bill was introduced to Parliament on the 17th February. It involves the biggest changes to the welfare system in at least 20 years, probably a lot longer. It includes the Universal Credit, intended to significantly reduce the poverty trap, by making it clearer to those on benefits that they would be better off in work.

A month ago, the IFS published “Universal Credit: much to welcome, but impact on incentives mixed”. Well worth reading. Here is a brief overview of what they say:

  • benefits will remain the same as under the present system for those who do not work
  • there is a larger earnings disregard – the amount someone can earn without losing any benefit
  • when someone works more hours, benefits are generally withdrawn at a slower rate, giving a strong incentive to work
  • there is a single system, which makes the system simpler, and avoids some “horrible interactions”.  This should improve take-up of the benefits

As well as winners in the system, there will be losers. There will be transitional arrangements, but, while most groups will be better off, the IFS identify some income groups who be slightly worse off in the long run. However, the IFS say “in general, the impact on incomes is progressive”.

The reform will be introduced for new claimants from 2013, rather than with a large-scale shift to the new system. This should mean relatively few families will be affected by teething problems.

There is a wealth of detail in these papers, and too much to comment on in detail, but here are a few of my reactions:

  • These reforms have, so far, had a warm welcome, but this won’t last.  The winners will stay silent and the losers will not.  As only new claimants will be affected for a number of years, no one will explicitly lose out until the full system is introduced, but there will still be considerable controversy.
  • At a time when we are dealing with a massive deficit, it was inevitable that a simplification of the system would mean some who lose out.  Suggestions that reforms like this wouldn’t lead to some losers were unrealistic.
  • The reforms will probably cost more than the £2 billion that has been identified, because the simplified system will make it easier to claim, so there will be higher take up.  This is a good thing.  But it will make the reform more expensive than is currently planned.
  • These are long-term reforms, which will take at least six years to fully take affect, so they don’t just affect this parliament, but the next.  They will only take full effect long after the last recession has ended.  If the economy has recovered from the recession by the time the measures are introduced in full, then the worry that they won’t work at a time of rising unemployment won’t apply.
  • Because this reform will not take full effect until after the next election, it makes getting political consensus more important than with many measures.  This may not be possible, but the coalition should make an effort to keep a political consensus.
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22 Comments

  • Liberal Neil 22nd Feb '11 - 10:40am

    Wise words George.

    You may be right that the cost will be higher because the claim process will be simpler. Of course that is probably a good thing, as thosemost put off by the current complicated system are often the most vulnerable people.

    On the other hand we don’t know what positive impact the increased incentive to work will have. It may produce a modest shift, or, if the lack of incentive really does deter people from working, it may be more substantial and end up saving more, as well as increasing the tax take.

    Either way, it is good overall.

  • Depressed Ex 22nd Feb '11 - 11:44am

    Call me cynical, but whenever I see a statement like “MOST groups will be better off [but] SOME income groups [will] be SLIGHTLY worse off” I get suspicious – especially when total spending is estimated to increase by less than 2% (on the basis of the same number of claimants).

    And considering those who will be better off are going to be those who are earning, I find it very difficult to see how this is going to be a progressive change.

  • We need to get away from the defunct idea that the more money the state hands out to people the more progressive it is. Liberal Democrats rightly believe in empowering people and enabling them to achieve whatever they are capable of while ensuring that the most vulnerable are still protected and cared for and included in community. So a reform aimed at helping people work when they are able and in doing restoring their dignity and independence as human beings is far more ‘progressive’ than just giving people more money as some kind of demeaning compensation for being unemployed or disabled or sick.

    Of course any reform will leave some worse off and some better off, but to focus on that without asking the question of what the welfare system is there for is a dangerously blind approach. We should be celebrating a new system which rewards those who work and is tailored to the individual circumstances of people and their families rather than a clunky and impersonal system which doles out money with no regard to the unique circumstances and situations people find themselves in.

  • Depressed Ex 22nd Feb '11 - 12:24pm

    We need to get away from the defunct idea that the more money the state hands out to people the more progressive it is.

    But of course no one has suggested anything so ridiculous.

    People must be extremely insecure about the merits of their own arguments if they have to resort to such ludicrous straw man manoeuvres.

  • I am secure in my belief that the socialist model of just handing out money without giving people real oportunity to get out of the ‘benifit trap’ is defunct.

    This seems like good progressive reform and as far as i can see very Liberal. Being on benifits should never allow a family to bring in more money than a comprable working family. It should always be financially advantagous to be in work and off benifits.

    As long as those members of society who trully can not work or are limited in their abilities are looked after with decency and respect then i wholeheartedly approve of the general direction the Liberal coalition is following.

    I am also against universal benifits. They may have served a purpose after the 2nd World War but today any state benifits MUST be targeted at those who trully need it.

  • Liberal Neil 22nd Feb '11 - 2:18pm

    @Depressed Ex

    “And considering those who will be better off are going to be those who are earning, I find it very difficult to see how this is going to be a progressive change.”

    It depends on the incomes of those who gain and lose, surely?

    If the losers are those currently recieving, say, £30K a year in benefits, and the gainers are those currently earning, say, £25K from some work and some benefits, then the change will be progressive overall.

  • @ Depressed Ex

    Your earlier comment makes a judgement about the policy being progressive (“I find it very difficult to see how this is going to be a progressive change”) on the basis of only talking about changes to income from the state (““MOST groups will be better off [but] SOME income groups [will] be SLIGHTLY worse off” I get suspicious – especially when total spending is estimated to increase by less than 2%”).

    It is no “ludicrous straw man manoeuvre” then to say that your case was entirely one of judging how progressive a policy was on the basis of how much money it gave people. This is the defunct idea we need to get away from.

    In regards to your slight nuance that you don’t think it will be progressive because those earning will receive more… Well, you take your choice about what you want a welfare state to do. Frankly it seems more Liberal and much fairer for the system to reward those who do work who are able to do so (which is seperate to how those unable to work – eg. seriously disabled people – are treated). I always thought we were the party of aspiration, empowerment and social mobility, not some throwback to Fabian statism.

  • Depressed Ex 22nd Feb '11 - 2:52pm

    James

    Presumably you missed the part of the article that quoted the IFS as saying “in general, the impact on incomes is progressive”. That’s what I was commenting on, and obviously it depends on the changes in people’s incomes. What else could it depend on?

    This is the economic sense of the word, of course, not the alternative sense popularised by Nick Clegg and his Young Libservatives, which allows you to describe as progressive any old bit of sub-Thatcherite tosh, provided you adopt a tone of agonised mock-sincerity and gaze earnestly straight at the camera for long enough.

  • Depressed Ex 22nd Feb '11 - 3:28pm

    It depends on the incomes of those who gain and lose, surely?
    If the losers are those currently recieving, say, £30K a year in benefits, and the gainers are those currently earning, say, £25K from some work and some benefits, then the change will be progressive overall.

    Well, that would be true, but I’ve just had a quick look at one of the IFS files and it doesn’t seem to be the case.

    Essentially it looks as though roughly 40% will gain, 20% will lose and the other 40% will see no change. For the gainers, the average gain will be about £28 a week, and for the losers the average loss will be about £26 a week (ignoring transitional protection).

    But when households are averaged by income group, these large changes aren’t evident because each income decile contains both gainers and losers. The largest average gain in an income group is only £5.43 a week and the largest average loss is only 55p a week.

    Averaged by income group the change is progressive because the bottom 6 deciles are gainers and the top 4 are losers, but only by 18-55p a week.

    But it does seem that 20% of households are going to lose to quite a significant extent – £26 a week on average. It’s not really evidence to me who these losers are from what I’ve read.

  • Surely the test is on who loses not the percentage!
    There are I believe a lot of households who would be in the 20% that lose out who are on above average incomes where the loss of £20+ per week would be annoying but would not push the household into poverty.

    Can we not move away from lumping huge numbers of people into a ‘decile’ or the ‘Bottom 20%’ and treat them like people? People will gain and people will lose, we must focus on the PEOPLE who are affected to ensure no household is pushed into poverty. I am about to become un-employed and all I want to know when the time comes is what support i will get – financial and educational – I want it to be simple, a single payment based on my needs and my entitlement and I want to know that when i get my next job I will have more money in my bank then when i was unemployed. I want to be a person not a stastitic.

  • Depressed Ex 22nd Feb '11 - 4:25pm

    There are I believe a lot of households who would be in the 20% that lose out who are on above average incomes where the loss of £20+ per week would be annoying but would not push the household into poverty.

    You “believe” it based on what? Obviously not the IFS study we’re discussing, which clearly shows the great majority of the losers (and the gainers) are households with lower than median incomes.

    But at least you’ve just illustrated perfectly why it IS important to look at the statistics, rather than retreating into vague – and often fallacious – generalities.

  • Norfolk Boy 22nd Feb '11 - 9:20pm

    @Liberal Neil

    “If the losers are those currently recieving, say, £30K a year in benefits,”

    can you point me to some numbers showing how many people receive 30K in benefits each year please, and what those benefits might be for? If the number is ridiculously low, or you can’t find one, can you please retract your statement?

  • John Fraser 22nd Feb '11 - 9:24pm

    @Liberal neil
    If the losers are those currently recieving, say, £30K a year in benefits, and the gainers are those currently earning, say, £25K from some work and some benefits, then the change will be progressive overall.
    ……………………………………………….
    As I think you well know from your previous posts Neil those few on £30K tend to be large families with perhaps 6 or 7 children you can have £30K in benafits but if you family is large enough still be confined to poverty . To suggest that its somehow progessive to attack large families in this way is something neither you (from my recollection of your politics but do correct me if I am wrong) or any other Lib Dems would ever have suggested in public prior to last may .

  • John Fraser 22nd Feb '11 - 9:28pm

    @ George.

    You accept that their may be losers but make no effort in your article to explain who they might be. I would be interested in your thoughts as to who you believe may lose (If you simply dont know thats fine) and more importantly to what extent any losses should be acceptable and where tyour own personal red lines are ?

    The principal behind this policy is a good one but i can’t help feeling it may yet be used as a tool for punishing those who can’t find work .

  • Depressed Ex 22nd Feb '11 - 10:12pm

    John

    Among the IFS documents referred to above is one entitled “Universal Credit: winners and losers”:
    http://www.ifs.org.uk/conferences/uc2011_jin.pdf

    There is a fair amount of information there, but I am still a bit mystified as to who which households are going to be losing out by the quite large amounts indicated.

    Note that the analysis is based on “equivalised” household income, meaning that income has been rescaled to take account of the size and composition of the household.

  • I see no Iceberg 22nd Feb '11 - 11:02pm

    “Because this reform will not take full effect until after the next election, it makes getting political consensus more important than with many measures.”

    The universal benefit is pure pie in the sky stuff that wouldn’t be fully implemented till 2018 if it ever does.
    The only reason it’s there is to act as a fig leaf for the enormous welfare cuts that are coming in long before this pipe dream ever starts.

  • George Kendall 23rd Feb '11 - 12:14am

    @Liberal Neil
    Indeed. No one can know what the effect of the Universal Credit will be. We won’t even know with hindsight, because so many other things will be happening at the same time, but I think it will make a difference to the unemployed taking up jobs. And, as you say, even if the difference is small, it’s the right thing to do anyway, for other reasons.

    @Depressed Ex
    It’s good to be sceptical about anything you read, but the IFS give a great deal of data in their report, and a lot of detailed arguments which I don’t have the space to report. If you have time, I’d recommend a read. It’s a balanced report, which is frank about some of the problems the reform will have, but I think it might answer some of your concerns. After all, they do conclude that is it, overall, progressive.

    @James
    I agree that enabling people is better than just supporting them. We should never be satisfied with leaving people in a dependent limbo. Although all parties support empowering people in theory, it is really hard to make practical changes to put this into policy. Which is why I’m such a fan of Universal Credit.

    @William
    Sorry to hear about your impending unemployment. And I completely agree with what you say about ensuring future employment gives you incentives to work.

    @John Fraser
    I’d love to answer your question in detail, but I’m now campaigning in Barnsley for the next week and a bit, and have only limited time and access to the internet. Obviously, when writing a short article, I can’t go into detail. But the IFS do describe this issue in detail.
    From memory, the IFS article talks about the reform continuing the trend of previous Labour reforms, where some groups that had had comparatively generous provision had that scaled back a bit, and others that had comparatively ungenerous provision had their provision slightly increased.
    There is also a small decrease in provision to some groups in the upper income deciles.

    But if you want detail, I can only suggest your read the report, as I’m unable to respond in the way I’d normally like to. The report is complex, because the benefits system is currently so incredibly overcomplex. But the IFS have produced some extremely helpful charts that illustrate some of this issues very well.

  • Depressed Ex 23rd Feb '11 - 9:44am

    It’s good to be sceptical about anything you read, but the IFS give a great deal of data in their report, and a lot of detailed arguments which I don’t have the space to report. If you have time, I’d recommend a read. It’s a balanced report, which is frank about some of the problems the reform will have, but I think it might answer some of your concerns. After all, they do conclude that is it, overall, progressive.

    Sorry, but I find that reaction extraordinary.

    Obviously it was your description of the report I was sceptical about, and quite rightly, considering that according to the IFS 20% of households are going to be not “slightly worse off” but, on average, £1,350 a year worse off.

    Clearly you haven’t read the comments above, but on that evidence it seems you haven’t yourself read the report you’re recommending to others!

  • Thanks Liberal Neil

    That’s what I expected. No figures just sub-Daily Mail prejudice.

  • George Kendall 23rd Feb '11 - 10:11pm

    There’s obviously a lot of material to wade through, in that there are four reports.

    I’ll provide a short specific quote, but I’d really recommend a quick read, at least of the summaries. That way you’ll see what the IFS are saying without me as a mediator.

    From: Universal Credit: winners and losers
    http://www.ifs.org.uk/conferences/uc2011_jin.pdf
    “2.5 million winners, 1.4 million losers, and 2.5 million not affected
    • Cost £1.7 bn a year in the long run (or without transitional
    arrangements)
    • Across the income distribution
    – Bottom six-tenths will, on average, be better off, with a progressive pattern.
    The richer ones will lose slightly on average.”

  • Depressed Ex 24th Feb '11 - 12:22am

    George

    Can you not just stop for a minute and read people’s comments, rather than just copying and pasting stuff that doesn’t address the issues that have been raised?

  • George Kendall 24th Feb '11 - 10:25pm

    @Depressed Ex “There is a fair amount of information there, but I am still a bit mystified as to who households are going to be losing out by the quite large amounts indicated.”

    I know my replies haven’t been as complete as they might have been a month of two back, but at the moment, that’s unavoidable.

    But I think, even with a lot more time, I’d probably not be able to answer your questions fully. There is a lot of information in these IFS papers, but, I think if you want access to the full detail of the IFS’s work, you need to become a member. Without it, I fear we’ll always find there are unanswered questions in IFS reports.

    I’m not a member of the IFS, and to be honest, at present, I doubt I could spend the necessary time to get to grips with the full detail of their methodology – especially, as now, when I’ve almost no free time, because i’m tied up with the Barnsley election campaign.

    However, there is still a great deal of useful information. I learnt lots from these papers. And it’s very interesting to read some of the nuanced opinions that the IFS express.

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