Universal Credit, due to be introduced by the Government next year will give rise to both winners and losers according to a preliminary analysis of the new welfare programme. It also warns that the separately operating Council Tax, with different rules across local authorities, has the potential to undermine many of the supposed advantages of the new all-in-one benefit programme.
The analysis, by a team of researchers, including Mike Brewer from ISER, and James Browne and Wenchao Jin from the Institute for Fiscal Studies, indicates that couples, particularly those with children, look set to gain by more, on average, than single-adult families, particularly lone parents, who will lose on average. It concludes that Universal Credit will strengthen financial work incentives for some people, as intended, but weaken them for others.
Mike Brewer explained:
“In general, incentives to work will be strengthened for the main earner in a family who works part-time or has low earnings, and will be weakened for those with higher earnings and for second earners in couples. Marginal effective tax rates will tend to fall for those on lower earnings and rise for those on higher earnings, although this pattern also depends on how many earners there are in the family.”
Alongside a series of cuts that will reduce welfare spending by £18 billion per year by 2014–15, Universal Credit will integrate and simplify means-tested welfare benefits and in-work tax credits for working-age adults into a single programme to be phased in from October 2013. The Government says this will make it easier for claimants to claim benefits, to make the gains to work more transparent and to reduce the amount spent on administration and lost in fraud and error.
Explaining the IFS analysis further, Mike said:
“More households will see entitlements rise from the move to Universal Credit than will see entitlements fall. Low-income families will see their entitlements rise by more than high-income families, on average, and couples will gain more from the reform, on average, than single-adult families, especially if there are also children in the family.”
The report cautions that government plans to have Council Tax Benefit operate separately from Universal Credit, and with rules that could vary across over a hundred English local authorities, could easily undermine many of the supposed advantages of Universal Credit.
The research follows an earlier IFS report, which concluded that the proposed reforms would act to increase relative and absolute measures of income poverty over the next decade.
The latest report also draws attention to the changing circumstances in which Universal Credit is being introduced. Mike added:
“Of course, moving from the current system of benefits and tax credits to a single benefit will require major administrative and IT changes. It is noteworthy that the government is attempting this at a time when spending on benefit administration (and public service spending generally) is being cut; the fact that such a major reform is being attempted at a time when benefit entitlements are being cut, overall, rather than increased, also increases the political risks to its implementation.”
The researchers estimate that Universal Credit will lead to entitlements to benefits of £1.1 billion a year greater than the current system (in 2014–15 prices); the change in actual benefit expenditure will depend upon how take- up rates change, how families’ labour supply and other decisions are affected, and the nature of the phase-in and transitional protection.
The report adds that an integrated in-work and out-of-work benefit programme could affect people’s understanding of the benefit system, actual or perceived uncertainties over entitlements, and the extent to which there is stigma attached to receiving benefits.
- The full report, Universal Credit: A Preliminary Analysis of Its Impact on Incomes and Work Incentives is available to subscribers of Fiscal Studies
- The report was co-authored by Mike Brewer at ISER and James Browne and Wenchao Jin at the Institute for Fiscal Studies.