Universal Credit

Paul GreggCMPO, Bristol

OutlineUniversal Credit involves the integration of 3

major parts of the welfare system and has been motivated by an argument of a growth in welfare dependency which is out of control

- assess state of welfare reliance

- discuss differences between Labour and Con/Lib strategies

- describe major structural reforms

- discuss (some of the many) issues they raise

Welfare RelianceThe numbers of working age families relying

on benefits for most of their incomes tripled from 1979 to 1994 but far lower at the end of this recession (generosity of benefits relative to median earnings fell by 1/3)

This can also be seen in the rise in the number of working age households with no earner - especially marked for families with children

Yet overall employment in the working age population has remained broadly the same apart from cyclical movements at about 75% in 1968, 1979, 1990 and 2001-2008

Welfare Reliance Numbers Claiming Major Workless

Benefits

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

Caselo

ad

(th

ou

san

ds)

Year

Sickness and disability benefits Lone parent benefits Unemployment benefits

Workless HouseholdsTrends: Each cycle has seen more workless

households until this one Source Labour Force Survey G+W ONS ONS

excluding students all Children

1977 8.2 - -

1987 16.4 - -

1995 19.3 - -

1997 18.2 19.8 18.6

2006 16.0 17.3 15.3

2009 17.3 18.5 16.7

2010 - 19.2 16.1

Polarisation of WorkExcess of workless households –

1977 -0.2%

1986 4.9%

1990 50%

1995 6.7%

1997 6.5%

2006 5.2%

2009 5.0%

Polarisation of WorkExcess of workless households –

Share of LP Lone Parents Couples in families with Kids

1983 10.5% 25.8% 1.3%

1996 23.6% 31.5% 2.8%

2006 26.0% 21.4% 1.3%

2009 30.6% 20.4% 1.7%

Labours Strategy Labour Government took the evidence of growing numbers

of children in workless families and argued that there needed to be:

1. Improvements in work incentives – both to work at all (Unemployment trap) and reduce the high Effective Tax Rates (poverty trap)

2. Support from National Minimum Wage and lower entry (10p) rate of tax/NI reforms (10p later abolished)

3.Job search Support (New Deals) and later post 2006-Conditionality for Lone Parents

4. Reducing Social exclusion (e.g. teen mothers) with high risk of being workless and poor

5. Increased generosity of support (in real terms) for families

Universal Credit Con-Lib coalition are outlining major reforms to welfare.Aims are:1. To simplify the system2. Improve Work Incentives and Reduce very high

effective tax rates3. Supported by reducing taxation for lower earners4. Enhanced job search support (Work Programme) and

conditionality5. Reduced generosity of support (uprating only with

CPI not RPI or Earnings) and reduced entitlements

Very strong similarity in approaches (apart from no. 5)

Universal Credit Merges1. The major adult welfare benefits into one single

working adult age benefit2. Housing Benefit 3. Tax credit systemInto new delivery system via PAYEEach step is large on its own – all 4 in 1 step is mammoth

administrative undertaking

Issues4. Work Incentives/ METRs5. Simplification/Admin6. Conditionality7. Savings and Contributory Benefits

Welfare Incentives – present system

Universal CreditUniversal Credit will combine adult benefits (JSA

etc) with HB and tax credits into one means tested benefit with single withdrawal rate

Universal Credit

1. Incentives and METRs –

Unemployment trap and poverty trap

Uni-credit will raise incentives to work a little but reduces incentives to work more

IncentivesFamilies with children – removes jump at 16 hours

(will be 24 hours for couples with kids) but reduces value of second job because – in tax free zone credit withdrawal rises from 39% to 65% and lower support for childcare costs

IncentivesChildless incentives to work <30 hours increase –

so this increases incentive to work a few hours for those not working and for those who are to reduce hours worked

METRs Current (2010) system has 4 main benefits – 3 are taken away in turn as Gross earnings riseAdult benefits JSA/Income Support/ESA METR 100%Working Tax Credit – METR 39% (must work 16+

hours)Child Tax Credit - METR 39%

Housing Benefit taken away at 70% of net of whats left

So if on WTC and HB METR=82% (.39+.7*.61)If tax+NI, WTC and HB METR=92% (.31+.39+.7*.3)If on tax+NI and WTC or CTC METR=70% (.31+.39)

Marginal Effective Tax RatesTypical Effective Tax Rate in 2010/11 is 70% (31p tax

and NI + 39p in Tax Credit withdrawal)

In budget 2010 tax credit withdrawal raised to 41p so typical METR rises to 72p

Under Uni-credit norm rises to 76p (31p tax + .65*69)

Marginal Effective Tax Rates

Financial year 1997/8

Financial year 2010/11

Financial year 2011/12

Current

Projected under Universal Credit (IFS)

80%+ 0.3 0.3 0.3 0.7 0 70-80% 0.4 0 1.4 1.7 2.0 60-70% 0.1 1.6 0.2 0.2 0.9 Under 60% 1.3 0.9

SummaryUC will

1. Raise work incentives for jobs at <16 hours for families with children (<30 hours for childless) So increased incentives to move into mini-jobs both for those not working and those working 16+ hours

2. Eliminate METRs >80% but Increase typical METRs from 70% to 76% reducing incentives to work more

3. Work Incentives for second earners fall due to higher withdrawal rate before paying tax and lower childcare support

4. Council tax benefit and passported benefits are not yet clear but will make picture worse

Universal Credit

2. SimplificationHuge administrative upheaval

Most people will claim single benefit but may additional benefits still in the system

The Uni credit will be very complex once childcare, passported benefits, unearned

income rules, permitted work rules etc etc

Universal Credit - Simplification1. Mean most people will claim only one

benefit

2. Disabled people will still get higher benefits – ESA WRAG for 1 year

- ESA Support Group for ever

3. Housing allowances will still be based on actual rents in social sector and thus UC will vary by rent changes as well as housing moves and earnings changes - complicated

4. Separate contributory JSA (6 months) and ESA (1 year) will persist

5. AA, DLA etc outside system - CTB unclear

Universal Credit

3. ConditionalityConditionality currently applies differently to

different JSA/IS/ESA groups - It does not apply to (in-work) tax credits

UC will allow conditionality for out of work to move from being group defined to more flexible approach (personalisation)

Not clear under UC how it will apply to in-work – not at all or an income/hours rule? Note incentive issues around ending 16 hour jump

Universal Credit

4. Savings/Contributory Entitlements

Universal CreditUC will

1. Not be open to those with savings over a limit (currently £16,000) whereas tax credits are not affected by savings

2. Place contributory benefits outside UC (ripe for abolition)

Implication is that contribution increasingly no longer recognised and self protection (saving) penalised. Tax relief on saving low for low-middle income families – so disincentives to save.