Written evidence submitted by Mckay2010
SUMMARY
The Universal Credit is an ambitious attempt to radically
change the benefits and tax credits systems. This note identifies
some of the key challenges that it faces. There remain important
unanswered questions about the treatment of carers and of council
tax benefit within Universal Credit. A more responsive system
also brings certain disadvantages as well as improvements, in
terms of effects on people's budgeting.
BACKGROUND
1. We have been here before. There have been
several past attempts to pursue greater integration of benefits
and the tax system (tax credits in this instance). They have tended
to founder, and for similar reasons.
2. In 1972 a Green Paper, Proposals for a
tax credit system, sought to combine the tax system with various
social security benefits. It stopped short of full integration.
Despite some support it was not taken forward; among several issues
there was also a concern that the proposed 50% withdrawal rate
was too high and would have negatively affected work incentives.
3. In 1984 researchers at the Institute for Fiscal
Studies (IFS) Dilnot, Kay and Morris proposed the most thorough-going
integration of taxes and benefits, including an end to contributory
benefits and means-testing of all social security. Whilst this
was not taken forward, the June 1985 Green Paper on the Reform
of Social Security talked about some closer integration of
taxes and benefits. Instead the 1988 Fowler reforms offered greater
consistency in the treatment of working and non-working families.
It aimed to pay Family Credit (an in-work benefit, the predecessor
of tax credits) through the wage packet, but this was not implemented
- probably by the strong combination of "purse-v-wallet"
arguments (non-working mothers would potentially lose out to fathers
who were in work) and opposition from the small business lobby
on administrative grounds.
4. The 1997 Labour manifesto said "We will
examine the interaction of the tax and benefits system so that
they can be streamlined and modernised, so as to fulfil our objectives
of promoting work incentives, reducing poverty and welfare dependence
and strengthening community and family life." Martin Taylor
(of Barclays Bank) was appointed to a task force to look at the
closer integration of taxes and benefits, and policy moved towards
tax credits firstly through Working Families' Tax Credit, and
now the Child and Working Tax Credits.
5. In 2009 the Centre for Social Justice's report,
Dynamic Benefits, proposed a "Universal Credits"
scheme. This would, "Simplify the benefits system by moving
from the current 51 possible benefits, to two streamlined payments
- Universal Work Credit, and Universal Life Credit". It proposed
a 55% taper on net income (55p in benefits lost for each extra
£1 in take-home pay).
6. The proposed Universal Credit is less ambitious,
seeking to replace six of the current benefits and tax credits
with a single programme, and with a 65% taper on net earnings.
The benefits/credits replaced are: Income Support, income-based
Jobseeker's Allowance, income-related Employment and Support Allowance,
Housing Benefit, Child Tax Credit and Working Tax Credit. As with
the CSJ's Universal Credits, the scheme also proposes a massive
extension of earnings disregards in benefits - the amount that
may be earned before benefits are reduced - except in the case
of Universal Credit for single adults who lose their current low
disregard entirely.
KEY CHALLENGES
7. Schemes of this type must meet a number of
difficult challenges. It is largely because of such challenges
that we have different kinds of benefits, and distinctions between
transfer payments made to working compared with non-working families.
The key challenges include:
- (a) Who, in couples, receives the payment?
If the aim is to reward work, then the worker might be best-placed
to receive the payment. If the well-being of the family and children
is important, it has been traditionally assumed that mothers should
be paid directly, as with Child Benefit. This is the "purse
versus wallet" dilemma.
- (b) Second, what are to be the periods of
assessment and payment? Income-related benefits have generally
responded to short term changes in income, on a weekly or monthly
basis, whilst tax credits have been assessed over a much longer
period and (with exceptions) are slow to respond to changes in
earnings. Tax credits in a given year may relate to the level
of income in the previous year - and a new disregard for income
drops (from 2012) will reinforce this "stickiness" of
tax credits.
- (c) What is the role and fate of benefits
that are outside the system? This includes the remaining contribution-based
and disability-related benefits and, importantly, benefits for
carers and mothers.
8. Whatever the administrative design of benefits
and tax credits, there are inevitably trade-offs between
maintaining work incentives, keeping people out of poverty and
keeping down the overall cost of any system.
THE UNIVERSAL
CREDIT
9. Universal Credit has particular answers to
some of these challenges. There are also a number of points still
to address where final decisions appear still to be made. Gareth
Morgan, in his analysis Benefits in the Future, comments
that the White Paper is "less definitive than is usual".
10. One benefit not included in the definite
plans is Carers Allowance. This is set at a lower level than Jobseeker's
Allowance, and including it within a single Universal Credit would
presumably require higher resources - or a more transparent admission
of the lower benefit rate for this group. The Social Fund is proposed
for partial inclusion in the new system (for the more automatic
elements) and partial "devolution" to local authorities
for more discretionary elements. Details of the movement of the
latter systems (Crisis Loans and Community Care Grants) are yet
to be revealed. Council Tax Benefit is being devolved to local
authorities, and reduced by 10% compared to current spending,
and is therefore also outside of the Universal Credit. However
the treatment of Council Tax is important to the calculation of
marginal tax rates, and to the certainty of any scheme wanting
to ensure that being in work is financially more rewarding that
being out of work.
11. Another issue not directly resolved by the
White Paper is the treatment of "passported benefits"
linked to existing schemes (such as free school meals, or free
prescriptions). These have previously been linked to conditions
based on combinations of hours worked and amounts of benefit received.
The plan is to withdraw such benefits gradually rather than at
a single income threshold, but the details are still to be worked
out.
12. The responsiveness of the Universal Credit
to changes in circumstances relies on delivery of "real time"
PAYE information from HMRC. This excludes the self-employed by
definition, and it presumably faces challenges where there are
two earners in a couple, or where a person holds more than one
job.
OTHER CONSIDERATIONS
13. Older people are excluded from the main Universal
Credit - although the White Paper allows that they might benefit
from inclusion if they are still in paid work of 16+ hours (and
thereby ineligible for Pension Credit). This also prompts questions
about the treatment of older people living with a partner of working
age, in terms of which benefits system they would be included
within (albeit this is nothing new).
14. A gradual introduction of Universal Credit
is proposed, starting with new claims and then bringing in existing
claimants. There is transitional protection for those who would
be worse off at the point of introduction. Experience suggests
that there are problems running different systems in parallel
(eg the child support systems) and this may give rise to a "better-off"
problem, where some existing claimants would be better off on
Universal Credit. There will need to be guidance on the circumstances
in which a new claim would be permitted. The transitional protection
may also need to consider the effect of small changes in circumstances
(eg a few hours of extra work) and their effects on the protection
offered.
15. The changes to the system of income disregards
is quite radical. If they are an important source of the advantages
of the Universal Credit over the existing system in showing that
work pays, why should their introduction be delayed? This would
seem one of the easier elements to introduce in the near future,
rather than waiting until 2017 for everyone to benefit from this
change.
16. Changes that replace several payments with
a single payment are likely to affect the way that people budget.
Whilst those on a salary may be familiar with a single payment,
those receiving several benefits may be accustomed to allocating
certain benefit to different uses - see for instance Elaine Kempson's
analysis of Life on a Low income (1996). They may have to learn
new budgeting habits under a Universal Credit. The plans for digital
applications might also need to reflect the use of potentially
costly digital devices by some low-income families.
17. Removing the stickiness of some benefits,
particularly tax credits, is potentially double-edged. A person
gaining a higher wage, or working more overtime, might see a reduction
in their Universal Credit payment in the next month rather than
in several months' time under the current system. This might mitigate
the perceived returns to working additional hours. The effect
of transparency is made all the more important as, overall, marginal
deduction rates continue to be relatively high for many people.
18. There are, of course, important advantages
to introducing the Universal Credit. This note has focused on
areas of challenge and potential difficulty.
December 2010
| 
