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Winners and losers under Universal Credit: a bit more detail

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The fact that many households will be worse off under Universal Credit (UC) has seen increasing media attention in the last few weeks. The attention reflects, in part, the Prime Minister’s announcement at Tory Party conference that “austerity is over”, creating speculation that something will be announced in next week’s Budget to help those who will be worse off under UC. In addition, new regulations on the next ‘managed migration’ phase of UC will be released soon after the Budget, setting out how some people will be protected (temporarily) from losses. Both events provide an opportunity for the government to think again about the future of UC and, in particular, the wisdom of cutting entitlements while trying to roll out a new benefit.

Using figures from a recent Office for Budget Responsibility (OBR) report (1), the overall expenditure saving from UC is relatively modest, a reduction of about £2.5 billion out of total spending of £63 billion a year. The important point though is that the net figure disguises much larger winners and losers. The OBR report suggests there will be about £10 billion of savings from the introduction of UC against £7.5 billion in extra costs. Within these gross cost and savings estimates are £5.5 billion less for ‘losers’, owing to lower benefit rates under UC,  and an extra £4 billion for ‘winning’ households benefitting from higher benefit rates under UC. The remaining £1 billion comes from other changes such as an expected reduction in fraud, limits for the self-employed and higher anticipated take-up of benefits (2).

Who are the losers under UC?

When we look more closely at the figures we can see that most of the £5.5bn of lower entitlements under UC come from changes that affect three main groups:

  • low earners affected by the reduction in the work allowance under UC
  • severely disabled adults
  • disabled children

It is worth discussing each of these in turn.

The reduction in the work allowance in UC is a policy hangover from George Osborne’s July 2015 Budget, where a parliamentary revolt meant that he backtracked on equivalent changes due to be made to tax credits. This means that in tax credits people can earn more than £6,000 a year before they start to lose money, whereas the figure in UC is half that for some and zero for many. That U-turn effectively delayed the pain of the cut, as very few people claimed UC at the time. But delaying does not reduce the pain of the cut when its time comes.

Cutting benefits through one-off reductions is always far more difficult than a slow ratchet of benefit freezes. And cutting amounts while people are being moved to a new benefit is riven with practical and political difficulties. Moreover, if George Osborne could not implement the cut in 2015 with a working majority in parliament it should not be surprising that the current government, struggling for a majority, would similarly fight-shy of inflicting pain on low earning households.

Unlike the reduction in the work allowance, the cut to severe disability premium has always been built into the structure of UC, as part of its ‘benefits simplification’ objective. At the moment there are a number of additions that disabled people can get – a lower and higher premium in Employment and Support Allowance and three rates in Housing Benefit. In UC, however, there is just now one addition to reflect disability. For many disabled people this means a reduction in their benefit entitlement, losing the enhanced disability premium (worth an extra £16.40 a week for single people) and also, for most, the severe disability premium (worth £64.30 a week for single people). Working disabled people may, of course, be impacted by both this and the cuts to the work allowance mentioned above.

The other part of the change to disability premiums is the reduction in the child disability premium. Here there is no simplification objective to reduce the number of premiums, and the qualification criteria are identical in Child Tax Credit and UC. The difference occurs in the benefit amounts available. While the higher rate under Tax Credits and UC is almost identical the lower premium is £146.81 per month less under UC.

In addition, the OBR forecasts that the self-employed will lose a further £1.3 billion owing to the Minimum Income Floor, the system whereby UC assumes that self-employed people earn the minimum wage even if their business does not support this level of earnings. There are then a further £2.8bn of savings from smaller measures, as set out in Table 1.

Table 1: Savings from Universal Credit

Gross saving areas

£billion

Less generous work allowances -2.4
Removal of severe disability child disability premia -2.2
Wider application of capital limits -0.2
Other (including interactions, NDDs, permitted work, etc) -0.8
Gross saving from lower entitlement rates -5.6
Minimum Income Floor for self employed in UC -1.3
Take up falls because of difficulty of claiming UC -0.4
Change in disregards for income changes, principally £2,500 allowance in tax credits -0.9
Reduction in fraud under UC  -expected but no evidence yet -1.5
Gross saving other changes -4.1

Gross savings from Universal Credit

-9.7

Source: https://obr.uk/docs/dlm_uploads/WelfareTrends2018cm9562.pdf

 

Who are the winners under UC?

As with the losers, most of the £4bn of higher entitlements under UC come from changes that affect three main groups:

  • people who work less than 16 hours a week  
  • low earning under 25s
  • families with high childcare costs

The first group, people working very low hours, are better-off for two reasons. First, they are eligible regardless of hours worked rather than the big jump at 16, 24 or 30 hours when tax credits kicks-in. Second, out-of-work benefits have a £ for £ withdrawal rate below 16 hours, whereas under UC the ‘earnings taper’ is gradual. The second group, under 25s without children but on low earnings, gain under UC for a simple reason – they were excluded from help under Working Tax Credit but are now eligible for support under UC. And the final group, those with high childcare costs, can be better off as UC covers 85% of the costs incurred on childcare, whereas Working Tax Credit only covers 70%. However, as the recent Work and Pensions Committee inquiry into childcare support under UC has highlighted this does not necessarily make the new benefit more appealing to parents, mainly due to the need to pay for childcare fees in advance (3).

Table 2: Costs of Universal Credit

Gross spending areas

£billion

Newly entitled, eg under 25 low earners 0.3
Gains to those working less than 16 hours 1.4
Child-limiting support 0.5
More generous childcare support 0.3
Other (including interactions) 1.5
Gross cost from higher entitlement rates 3.9
Take up extra benefits as well as tax credits (outweighs effect of any entitlement rule losses) 2.6
Take up benefits for first time 0.3
Miscellaneous changes not mentioned already 0.5
Gross cost from take-up and other changes 3.4

Gross cost of Universal Credit

7.3

Source: https://obr.uk/docs/dlm_uploads/WelfareTrends2018cm9562.pdf

 

Work incentives

These winners and losers have not been evenly spread during the rollout of UC around the UK. Instead, by design, early recipients of UC were proportionately far more likely to be winners, with high numbers of under 25 year olds who became eligible for in-work support for the first time. This was due to the initial ‘live’ service being limited to simple cases, whereas difficult cases (including all losing groups) were explicitly excluded.

The government has used evaluations of the labour market impact of UC from the early part of the roll-out to argue that UC gets more people into work (4). But in terms of evaluating the effect of UC on the labour market when fully rolled-out this is a poor guide. The OBR state: “Simple cases are unlikely to be representative of the overall caseload: the evaluation compares single, unemployed claims across UC and jobseeker’s allowance. Most cases will have more complex circumstances. The extent to which observed effects on simple cases will be replicated in more complex ones is subject to considerable uncertainty”(5). Moreover, these evaluations do not take into account the effect of the work allowance cut. As the NAO conclude, the labour market benefits of UC are, at best, not yet proven, and at worst impossible to prove (6).

What might happen next?

The claim from defenders of UC is that its current problems stem solely from the cuts to the work allowance imposed by George Osborne (7). However, creating millions of losing households was always built-in to UC, as these savings were needed to balance the costs of the policy. The fact that the net effect of UC was approximately neutral in its original design, with winners and losers approximately balancing, is neither here nor there. Creating winners, as occurred in the early stages of roll-out is easy. As the government is learning, the hard bit is implementing cuts.

In each losing case the policy position seems unlikely to endure in its current form. In the case of severely disabled adults the policy has already been partially reversed due to a successful legal challenge this summer, and I would not be surprised if the continuing challenge to this case and that of disabled children succeeds in reversing the policy completely (8).

There has always been a question about whether the savings from UC would in fact be achievable. As with previous social security reforms there is an extent to which savings have been offered in the expectation that the policy will be reversed before it comes to pass. Whether this applies to UC remains to be seen but my prediction is for various slow and steady changes that will end up eating at least the predicted £2.5 billion of savings, starting during the Budget next week.

Sources:

(1) https://obr.uk/wtr/welfare-trends-report-january-2018/
(2) Note that this analysis ignores ‘transitional protection’, the process by which claimants moving from legacy benefits to UC are ensured they will be no worse off, as long as their circumstance do not change. As its name implies, this protection is not meant to be a permanent part of the system and the effect of UC is looked at when it is fully rolled out, after transitional protection is no longer relevant.
(3) https://www.parliament.uk/business/committees/committees-a-z/commons-select/work-and-pensions-committee/inquiries/parliament-2017/inquiry/
(4) https://assets.publishing.service.gov.uk/government/uploads/system/
uploads/attachment_data/file/714858/understanding-the-impact-of-universal-credit-on-the-labour-market.pdf

(5) https://obr.uk/docs/dlm_uploads/WelfareTrends2018cm9562.pdf
(6) https://www.nao.org.uk/wp-content/uploads/2018/06/Rolling-out-Universal-Credit.pdf
(7) http://welfarereformclub.net/2018/10/16/further-further-delays-to-universal-credit/
(8) http://cpag.org.uk/content/universal-credit-disability-and-transitional-protection

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