Some thoughts on the Universal Credit

In the midst of much media hyperbole, policy scrutiny and political chatter, the Universal Credit was finally unleashed on the UK Public last week, albeit through a small pilot in the town of Ashton Under Lyme. In what many have dubbed the most significant welfare reform since tax credits, I thought I would offer some observations on some of the opportunities and challenges of this Iain Duncan Smith (IDS) brainchild.

Simplicity

Many will tell you that for all the benefits of tax credits, they were extremely complex; both in terms of the bureaucratic behemoth required to administer the plethora of payments available, and in terms of claimants understanding what it was they were actually entitled to.

To this end, the Government and IDS argue that due to the Universal Credit combining many of the existing tax credits and benefits (such as Child Tax Credit, Working Tax Credit, Housing Benefit, Income Support, income-based Jobseeker’s Allowance and the income-related Employment and Support Allowance) into one uniform payment, simplicity will result. In turn, they argue that this will mean a less complex bureaucratic framework, meaning in turn that fraud and error should be reduced, easing the public purse-strings.

As far as claimants of Universal Credit are concerned, one might also argue that increased simplicity will result in recipients being able to more easily establish how much (or little) they will be entitled to. This is of course on the proviso that claimants will be able to get online and fill out the forms that will tell them how much they’ll get in the first place (the form filling required for Universal Credit award will all be done online.)

Whilst in my view this theoretical increased simplicity is to be applauded, we are still to see how this will work out in practice, and given the recent news reports about apparent problems with the computer system behind Universal Credit, it may be best at this stage to reserve absolute judgement!

Before I move on, simplicity matters because (and this I think is often missed in policy and media debates on welfare) it affects what is known as the ‘take up rate’ of a benefit or credit. In other words, a credit could be worth £1,000,000 to a certain individual or family, but if you need a PhD in order to fathom all the forms then will the eligible family actually be able to claim the benefit and be any better off in reality?

Work incentives

Under the soon to be overhauled system of tax credits, it was, unbelievably enough, possible to be facing a Marginal Effective Tax Rate (METR) of some 96%, meaning that for every extra £1 earned through something like overtime, an earner would only see 4 pence come into the household.

In relation to this, IDS has said that under Universal Credit ‘work will always pay’ and he’ll argue this is backed up by the fact that no earner will face an METR higher than 76.2%; meaning that an earner subject to this METR will see 24 pence come into the household for every extra £1 earned.

Before we got too excited however, where would this ‘reduced’ METR leave the UK in comparison to other developed countries? Not in a very flattering position is the answer. The latest data from the OECD shows for instance that, an METR of 76.2% would leave a one-earner family on 75% of the OECD average wage at the top of the pile of international families. [1] Thus, whilst it’s welcome that the absolute highest METR’s under Universal Credit are set to reduce, it is still worrying that a quarter of all families will face an METR of 76%.

Generosity

Last, but most definitely not least, for all the design details and quirks of the Universal Credit, what most families and individuals will be most interested in is whether the Universal Credit will leave them in or out of pocket in comparison to Tax Credits.

As with most tax, benefits and welfare policy, the answer as to whether you will be a winner or loser very much depends on who you are.

To take just two family types, the respected organisation, The IFS (whose conclusions have been confirmed by the Department of Work and Pensions) have said that

Lone Parents with two children

Working less than 16 hours a week will be better-off

The difference will be very little for those working between 16 and 29 hours, and:

Those working 30 or more hours per week will be slightly worse off.

For couples with two children

Single earner in-work couples will be-better off

Couples with savings of more than £16,000 will be worse-off.

Taking a look at the bigger picture, The DWP published an Impact Assessment in December 2012.  This shows that 3.1 million households will have higher entitlement as a result of Universal Credit – on average gaining £168 per month. Around 1.9 million households will se an increase of more than £100 per month.   2.8 million Households will have lower entitlement- The average reduction will be £137 per month. The majority will have a reduction of less than £100 per month.

Conclusions

All in all, there appears to be some encouraging points to the Universal Credit, not least the fact that it will hopefully prove simpler to administer than tax credits, and will reward those who work for any amount of hours (under tax credits, one has to work at least 16 hours per week before becoming eligible.)

However, there are still too many unknowns in the mix for us to judge whether the Universal Credit will be a success. Will the new computer system be able to cope? Will those without easy and convenient access to the internet end up losing out? How will the financial losers cope with the loss in income? With all these questions still to be answered, there’s still much to play for all parties concerned when it comes to this wide ranging policy reform.


[1] This assumes that the 2011 METR’s for the 33 other OECD nations stay at a similar level when the Universal Credit is introduced.

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