Universal Credit might be under budget, but it will still leave many out of pocket

To be fair to the much maligned IDS, he did a decent job on Sunday’s Andrew Marr show of trying to gloss over bad news. This bad news being that as opposed to 1 million UK citizens being enrolled in the new system of benefits payments as was originally planned by this point, only 26,000 have made the transition. The Work and Pensions secretary attempted to deflect this troubling headline by revealing that the replacement for the current system of tax credits would be delivered some £600 million under budget, which to be fair is quite impressive.

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Despite the numerous delays and now infamous problems with the dreaded new IT system, the £600 million dollar question remains: will people be better off under Universal Credits than they were under the old system of Tax Credits? Two ways in which this question can be answered are by comparing work incentives (or the financial reward from any extra income earned) and how generous payments will be for various family types compared to Tax Credits.

By way of brief introduction, Universal Credit will essentially combine many of the existing state transfers (including tax credits) into one existing payment. It will replace Income-based Jobseeker’s Allowance, Income-related Employment and Support Allowance.

Will Universal Credit make work pay?

Under Tax credits, it is, unbelievably enough, possible to face a Marginal Effective Tax Rate (METR) of some 96%, meaning that for every extra £1 earned through overtime for instance an earner would only see 4 pence. Yes, that’s right, 4 pence. Such crippling work incentives are basically the consequence of Tax Credits being very generous for very lowly paid earners (by OECD standards anyway) but being withdrawn extremely quickly as one progresses up the income distribution. Even if you take Housing Benefit withdrawal out of the equation, many households still face rates of 73%. Lone parents and one-earner couples with two children on incomes between £18,000 and £27,000 per annum (the latter of which are at particular risk of poverty according to the Joseph Rowntree Foundation) are amongst those affected  by these crippling incentives.

Under Universal Credits, 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. No more ridiculous 96% rates! Rejoice! However, the DWP admit that the majority will actually see their METR’s increase slightly from 73% currently to 76%.

Even if we take the best case scenario (where METRs are reduced from 96% to 76%), where would this METR leave the UK in comparison to other developed countries? Not well. Data from the OECD shows for instance that, an METR of 76.2% would leave a -earner family on 75% of the OECD average wage (about £27,000 per year) with the worst work incentives in the OECD.  Thus, whilst under Universal Credit work might be more rewarding for some families, it’ll still be far too high for too many others. On this basis, to claim so confidently that ‘work will pay under Universal Credit’ is quite a stretch. The fact is that most governments and families throughout Europe would baulk at such poor work incentives. Thus, whoever comes into government come May 2015 and whatever they think of Universal Credit will have to tackle this issue with some urgency.

Will Universal Credit be more or less generous than 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.

The respected Institute for Fiscal Studies (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. As far as couples with two children are concerned, single earner in-work couples will be-better off, whilst couples with savings of more than £16,000 will do worse.

Taking a look at the bigger picture, The DWP published a revealing 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 see an increase of more than £100 per month.  2.8 million Households will have lower entitlement, the average reduction here being £137 per month. Thus, it appears that the majority of recipients will do better out of Universal Credit than Tax Credits (although a significant minority won’t), an achievement given the tough fiscal climate in which IDS and his department have had to operate in this term.

Conclusion – More to do

Whilst the relative simplicity of Universal Credit is to be applauded, and whilst the outrageous 96% METR will go, work incentives will actually decrease for the majority of claimants. As things currently stand, it cannot really be claimed that Universal Credit will make work pay. On the other hand, the majority will actually gain monetarily from the new system. We therefore have something of a mixed picture. Given the amount already done, whoever comes in post May 2015 will be stuck with this policy, and would be worth their while looking at ways to improve work incentives whilst ensuring that the poorest continue to be protected.

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