Welfare Reform Bill

Memorandum submitted by The Centre for Social Justice (WR 17)

The Centre for Social Justice

1. The Centre for Social Justice (CSJ) was founded by our current Secretary of State for Work and Pensions, the Rt Hon Iain Duncan Smith MP.

2. Through its analysis and policy recommendations the CSJ has led the debate about Britain’s overly complex and unrewarding benefit system for many years. The CSJ reports Breakthrough Britain and Dynamic Benefits have heavily influenced the coalition Government’s reform agenda.

3. The CSJ commends the Government’s introduction of the Welfare Reform Bill, and in particular Universal Credit. Our research shows that the Universal Credit will help to reverse the social breakdown and in particular a culture of worklessness that blights our most deprived communities.

Deven Ghelani, Senior Researcher

4. Deven wrote a short paper and campaign ed independently on welfare reform after a short spell on Job Seekers Allowance in April 2008 . He has worked in the welfare to work sector and joined the welfare and government spending team at the CSJ in January 2010. He worked on the implementation plan for ‘Dynamic Benefits’ and the recent ‘Outcome-based Government paper.

5. Deven has worked for KPMG, a start-up company, a law firm and as an English teacher in Japan . He has worked on voluntary initiatives in Tanzania and the UK.

Universal Credit: Points to consider

6. The success of the welfare reform bill depends almost entirely upon the ability of the Universal Credit to change behaviour and get people into work .

a. The CSJ is concerned that t he debate focuse s overly on financial implications and incentives; and risks neglecting scrutiny over simplification .

b. The way in which benefits are delivered and how they are understood by claimants are of paramount importance to behaviour change .

i. Simplification can reduce both DEL and AME expenditure; reducing running costs and delivering a massive improvement in effectiveness .

ii. The smoothness of transition into work and the support provided to job seekers in their first few weeks of unemployment deserves as much consideration as financial impacts and winners and losers .

iii. The bill makes provision for pilot schemes; this is sensible and the nature and aims of these pilot schemes need broad discussion .

iv. The Government’s ability to deliver and admin i ster the IT change required needs open scrutiny .

c. Models of the financial impact of Universal Credit do not take into account behavioural effects

i. More people moving into work as a result of improved financial incentives, a simpler system and easier transition from benefits into work

ii. Greater takeup rates of benefit for those on low incomes because of a simpler system and wider eligibility

7. The payment of Universal Credit is very deliberately made on a Household Basis .

a. Today, some benefits are paid on an individual basis (JSA, ESA, IS) while some are paid on a household basis (HB, CTB , Tax Credits ).  Simplification requires that they all be paid on the same basis.

b. The CSJ in ‘ Dynamic Benefits   very deliberately opted for payments on a household basis to concentrate work incentives on workless households while controlling costs.

c. Payments on an individual basis were considered , however they were ruled out primarily because of cost considerations.

i. Individual payments would eliminate the couple penalty, allow for easier future integration with an individually based tax system and keep payments and incentives separate within households .

ii. If the amount paid to single people remained the same, the elimination of reduced household payments would cost ~£ 7 25m p.a. (static cost estimate) .

8. Incentives to work are concentrated on the first earner in a household , in order to reduce the number of workless households in the UK.

a. The earnings disregard allowance is on a household basis; this concentrat es work incentives on the first earner in the household .

i. Second earners are unlikely to have any of their income disregarded from benefit withdrawal; an EMTR of 65% .

ii. This applies only as long as the household is claiming benefits .

b. Universal credit is to be withdrawn against gross (rather than net) household earnings; i.e. before tax is applied on an individual basis .

i. Universal Credit is therefore withdrawn sooner, controlling cost .

ii. The effective marginal tax rate is higher than it would otherwise be for a (small) proportion of households, reducing work incentives and take home income; particularly for the second earner in the household .

c. Note that income distribution in the household changes; second earner income would go into the second earners nominated bank account, but reduce benefit payments to the first earner.

9. There will have to be an informal ‘hours rule’ based on how much claimants have to earn before conditionality is no longer applied .

a. The Government should calculate the amount earned for a household to be off benefit, and the equivalent number of hours on the minimum wage .

b. The amount earned before conditionality is no longer applied could be lower than the maximum (in point 4a. above), and lead to an indefinite long term in work subsidy. The limits could vary by claimant group i.e. based on :

i. the conditionality grouping of the claimant .

ii. the household no longer claiming JSA or equivalent, but still receiving a housing subsidy .

10. Universal Credit will interact with a number of government departments

a. Avoiding a silo mentality and sharing information as appropriate need to be discussed to make the most of the Universal Credit reform .

i. Passported benefits such as free school meals, prescriptions and dentistry can cross departmental boundaries .

ii. Council tax and its inclusion as part of Universal Credit, or otherwise its interaction with UC needs to be clarified .

b. These benefits; either cash or in kind, have the potential to support or undermine the main objective of universal credit reforms .

The following points explain CSJ perspectives on areas of concern with the the Welfare Reform bill

11. The CSJ report ‘Dynamic Benefits’ did not factor in the cost of c hildcare

a. We recommended that childcare be reviewed independently from benefit reform

b. The challenges of childcare could be summarised as

i. The high cost of childcare in this country

ii. For many parents on low incomes, their level of earnings relative to the cost of childcare resulting in low work incentives

iii. The case for a large taxpayer subsidy for childcare when there are many other competing demands for public money

12. The CSJ argued against the savings limit of £16,000 for benefit claimants

a. In ‘Dynamic Benefits’ we argued that d isincentives for saving , home ownership and couple formation acted against the development of long term protection s from dependency

i. Many households have zero or low levels of savings, below the limit

ii. Some households avoid savings limits by spreading savings across family members, or failing to declare all of their savings

iii. The same is likely to happen under universal credit

13. Welfare reform is necessary irrespective of the demand for labour and the level of job creation.

a. Job creation is a necessary condition to move people into employment under both the current welfare system and under the Universal Credit .

b. Universal Credit needs to be in place as soon as possible in order to empower benefit claimants to benefit from the economic recovery.

c. Once the architecture for the Universal Credit is set, we encourage a future Chancellor and Secretary of State to review the withdrawal rate to improve incentives.

d. The current welfare system contributed to 4.5m people remaining on out of work benefit during 63 consecutive quarters of economic growth. We cannot allow this to happen again.

14. There is sufficient flexibility within Universal Credit to accommodate regional v ariation s in living costs

a. The Universal Credit accommodates flexible awards for housing, caring responsibilities and children introduce based on personal circumstances

March 2011