We should welcome this as a bold attempt to simplify the current labyrinth system, which can be confusing to understand and traverse for claimants. The media headlines on the universal credit were easy to catch, but as is often the case, the devil is in the detail. Below is a comprehensive briefing on the key issues that matter to Progressives.
How sound is the universal credit model?
As with all economic models, certain assumptions have to be made. However, one significant and deliberately unpublicised assumption the government made in their calculations for the universal credit was to assume as its baseline the ‘current benefits and tax credits system, assuming the current system incorporates all of the changes announced up to and including the 2010 spending review’.
This means the universal credit will be compared not to the current levels of benefits and tax credits people are receiving, but those in the future as set out in the government’s budget and comprehensive spending review. This really matters, as the government is planning to wield its axe on the welfare budget viciously in the run-up to the universal credit.
Over the next two years, childcare payments will be cut, elements of the working tax credit and child benefit will be frozen, payments to the child trust fund will cease, inflation indexation will be weakened (the switch from RPI to CPI for benefits and tax credits) and there will no longer be any child benefit payments for higher rate taxpayers. The TUC has calculated all of this could see some families losing up to £2700 before the universal credit is even introduced.
To get a clearer sense of the sheer gravity of cuts beckoning, the cuts in childcare support under tax credits will equate to a loss of £435 in income for a typical family while the abolition of educational maintenance allowances will lead to a loss of £1,200. Compare this to Labour’s 10 per cent tax debacle which cost households £232, and you begin to see just how vicious all this stuff is. So, remember the government is not using current benefit and tax credits levels as its baseline, but that in the future, inclusive of the cuts announced in last year’s budget and spending review.
What about council tax benefit?
Perhaps what is more misleading and problematic with the government’s calculations, is the adoption of the current rate of Council Tax Benefit. It was announced in the spending review that the benefit is to be abolished and replaced with grants to local authorities in April 2013. Spending will be reduced by £500 million. This is a serious problem for several reasons.
Firstly, it means the government’s model for the universal credit has been based on numbers that they know will be lower by the time the new system is rolled out. More importantly, the decision to devolve responsibility and administration of council tax support to low-income households will create significant variations around the country which could seriously derail the universal credit, particularly its working incentives.
The Institute for Fiscal Studies have warned about these changes and the effect it will have on the universal credit. They argue it runs counter to its principles and may potentially lead to a ‘postcode lottery’. It also creates undesirable and perverse incentive for councils to encourage low-income households to move to different areas.
Is everyone a winner?
Clearly no. Yes, there will be 2.7 million households who will see an increase in their entitlements. But there will be 1.7 million households with lower entitlements. Of those, 1.2 million are found in the bottom two quintiles. 400,000 households will see a reduction in incomes by £25 or more per week.
Will the universal credit help families, particularly lone parents, into work?
The government kicked the issue of childcare payments into the long grass. Yet we know from the spending review that they are planning to reduce the amount of childcare support available under the families element of working tax credits from 80 per cent to 70 per cent. This will have a big impact on low-middle income families, and likely worsen work incentives. Roughly six out of 10 families that claim this are lone parent households. On average they will lose close to £500 a year, some even as much as £1300. Recently conducted research by the Daycare Trust found nursery place prices rose twice as fast as wages last year. The government needs to seriously rethink the logic, let alone the fairness, behind this cut.
Will it improve work incentives?
The government has said the universal credit will increase the incentive to start work and do extra hours, as there will be lower participation tax rates (the incentive people have to enter work) and marginal deduction rates (the incentive people have to progress through work, ie doing more hours).
The number of households facing PTRs over 70 per cent for working 10 hours a week, will fall by around 1.1 million under universal credit. Similarly, those engaged in 16 hours of work, will see their PTRs over 70 per cent fall by over 900,000. We should welcome the universal credit’s ambition in all but abolishing these extremely high withdrawal rates.
However, some 2.1 million individuals will have higher MDRs under universal credit. The median increase will be around four percentage points. The PTR for second earners will generally be higher under the universal credit. Up to 330,000 second earners will see a weakening in their work incentives.
Will this help the ‘squeezed middle’?
Not according to the Social Market Foundation. They have highlighted how the universal credit will penalise working families who have saved for their futures. Under the new rules, 400,000 families, who are currently receiving tax credits, will lose their entire eligibility as households with savings of £16,000 or more will no longer be eligible. An additional 200,000 families with savings between £6,000 and £16,000 will lose some of their entitlement.
Read also our Monday columnist Kate Green MP on the distinct changes in tone from the government on the universal credit