Universal Credit
Paul Gregg
CMPO, Bristol
Outline
Universal 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 Reliance
The 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
7,000
Welfare Reliance
Numbers Claiming Major Workless
Benefits
6,000
Caseload (thousands)
5,000
4,000
3,000
2,000
1,000
0
Year
Sickness and disability benefits
Lone parent benefits
Unemployment benefits
Workless Households
Trends: 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 Work
Excess 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 Work
1983
1996
2006
2009
Excess of workless households –
Share of LP
Lone Parents Couples
in families
with Kids
10.5%
25.8%
1.3%
23.6%
31.5%
2.8%
26.0%
21.4%
1.3%
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 2006Conditionality 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 system
2. Improve Work Incentives and Reduce very high
effective tax rates
3. Supported by reducing taxation for lower earners
4. Enhanced job search support (Work Programme) and
conditionality
5. 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
Merges
1. The major adult welfare benefits into one single
working adult age benefit
2. Housing Benefit
3. Tax credit system
Into new delivery system via PAYE
Each step is large on its own – all 4 in 1 step is mammoth
administrative undertaking
Issues
1. Work Incentives/ METRs
2. Simplification/Admin
3. Conditionality
4. Savings and Contributory Benefits
Welfare Incentives – present system
Universal Credit
Universal 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
Incentives
Families 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
Incentives
Childless 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 rise
Adult 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 Rates
Typical Effective Tax Rate in 2010/11 is 70% (31p tax
and NI + 39p in Tax Credit withdrawal)
Marginal
Financial year Financial year Financial year Current
Projected under
Effective Tax 1997/8
2010/11
2011/12
Universal
Rates
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
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)
Summary
UC 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. Simplification
Huge 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 - Simplification
1. 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. Conditionality
Conditionality 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 Credit
UC 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.