White Paper on Universal Credit

UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE    To be published as HC 743-i

House of COMMONS

Oral EVIDENCE

TAKEN BEFORE the

Work and Pensions Committee

White Paper on Universal Credit  

Wednesday 26 January 2011

Mr Mike Brewer, Dr Patrick Nolan and Dr Stephen Brien

Ms emily holzhausen, mR sam royston and mr jim vine

Evidence heard in  Public Questions  1 - 71

USE OF THE TRANSCRIPT

Oral Evidence

Taken before the  Work and Pensions Committee

on  Wednesday 26 January 2011

Members present:

Dame Anne Begg (Chair)

Harriett Baldwin

Andrew Bingham

Karen Bradley

Alex Cunningham

Kate Green

Mr Oliver Heald

Glenda Jackson

Stephen Lloyd

Theresa Pearce

________________

Examination of Witnesses

Witnesses:  Mr Mike Brewer, Deputy Director, Institute for Fiscal Studies, Dr Patrick Nolan, Chief Economist, Reform, and Dr Stephen Brien, Chairman, CSJ Economic Dependency Working Group, gave evidence.

Q1 Chair: Thanks very much for coming to our first evidence session of this quite short inquiry into the Government’s proposals for a Universal Credit. Hopefully, in an hour, we’ll be able to tease out some of the main arguments for and against, and perhaps some of the elephant traps in what appears to be a very simple system on the surface, but I suspect is a bit more complicated underneath. If I can ask you first, Mike, about the piece of work that the IFS has done with regard to winners and losers; what were the findings of that report? Who were the biggest winners, who were the biggest losers?

Mike Brewer: Yes, thank you. We think that, as you say, there will be both winners and losers from this Universal Credit. Based on the information in the White Paper, 2.5 million families will gain, and in the long run after that transitional protection runs out, 1.4 million families will lose. It’s not simple to characterise who are the main winners and losers and why these gains and losses happen. Amongst those 1.4 million families that lose: 450,000 single adults, 140,000 couples without children, 440,000 couples with children, 370,000 lone parents. Amongst the 2.5 million families that gain: about 500,000 single adults, 280,000 couples without children, 1 million couples with children and 600,000 lone parents. I guess that the broad patterns we found were that twoadult families tend to do better than oneadult families, with or without children; low-income families tend to do better than middle-income families. It’s a progressive reform.

Q2 Chair: Do you think then that the Government was thinking of that when it devised the Universal Credit? Was there a plan behind who the winners and losers would be, or is that just an accident of the way that the present benefit system works as opposed to how the Universal Credit will work?

Mike Brewer: I think it’s a bit of both. Certainly the present benefit and tax credit system are not always perfectly aligned with each other, particularly the difference between tax credits and benefits and how they treat lone parents and couples with children. So there is a sort of inconsistency at the moment that has to go away when you move to a more integrated system like Universal Credit. But the pattern of gains and losses that we found come mainly from the choice of the earnings disregard, and those are brand new parameters that the Government had to choose. Given that Government had six months to work out what these parameters should be, I imagine that the pattern of gains and losses are deliberate, in particular the gains for couple families I imagine are deliberate, and they’re mostly a choice, mostly arising because of their choice of the earnings disregard.

Q3 Chair: The analysis that you did was based on the situation as it is today and the benefit system as it is today, but does not take into account any changes that are already in the pipeline, or is that not the case?

Mike Brewer: No, that’s not right. We tried to forecast what would happen in 2014, so we took account of all the changes announced by the Government between now and 2014 and then compared that with our best guess of how the Universal Credit would work.

Q4 Chair: Is it fair to say that some of the figures that the Government are quoting with regards to winners and losers, because they’re averages, actually disguise some of the bigger winners and some of the bigger losers, particularly the losers?

Mike Brewer: The Government did a standard distributional analysis, the average change in income by income decile, and we broadly replicated that. But it’s absolutely the case that within those simple averages there’s an awful lot of variation, much more variation in winners and losers than in a conventional, say, Budget announcement about some changes to taxes and benefits. The Government have basically ripped up the entire benefits system and started again from scratch. They’ve done a pretty good job of replicating current entitlements, but obviously you can’t perfectly replicate a complicated system with a simpler system. We found a huge amount of variation; within every family type there are winners and losers and within every income decile group there are winners and losers.

Q5 Chair: But the nature of it being simple, it’s much more broad brush. Does that mean it’s going to be less sensitive and flexible than the present complicated benefit system is?

Mike Brewer: People often raise that as a concern. I don’t think we really found that in our modelling. I think we found that some of the complexities in the current system do look like complexities and don’t seem particularly justified. For example, one of the things we found is that families that work 16 or 30 hours are probably going to lose under the move to Universal Credit, but families who work 15 or 17 or 29 or 31 hours are probably going to gain under the move to Universal Credit. That seems odd, but it reflects an oddity of the current system-

Chair: Which are the cliff edges.

Mike Brewer: -exactly, the cliff edges, thank you-rather than a broad brush and simplistic approach of the new system.

Q6 Chair: Can I start by asking you, but then broadening this question out to the others in the panel, in terms of the proposed cuts to benefit spending that was in the Budget and the comprehensive spending review, and also the Government’s promise that no one will be worse off, can the Government fulfil that promise that no one will be worse off with the move to Universal Credit, if that is based on today’s figures as opposed to the fact that a number of benefits are going to be cut before they go into the Universal Credit? Is that a fairer analysis of what might happen?

Mike Brewer: The big picture is that this Government has announced cuts to welfare spending worth £18 billion a year by 2014-15, and we think the Universal Credit in the long run will cost about £1.7 billion a year before you take into account the higher take-up and behavioural effects. Obviously, overall the Government is still making large cuts to welfare spending compared with what would have happened had it implemented the policies of its predecessor. The Government’s pledge or claim that no family will be worse off on the transition is a transitional protection issue; it will go away over time as family circumstances change and as this transitional protection, which is only in cash terms, gets eroded by inflation and obviously as new families start to claim benefits. So I think it’s more sensible to focus on the long-run position, as we do in our report, where there are clearly losers from Universal Credit.

Q7 Chair: I am going to move to Stephen and ask that question, but before you answer that question, can you say whether what’s come out in the White Paper is what you envisaged, as I suppose I could say that the Centre for Social Justice was the architect of this policy?

Dr Stephen Brien: Certainly, and let me just clarify, because I’ve been in front of this Committee before, that I’m here in my capacity as the author of the Dynamic Benefits report rather than somebody who has been working with officials over the summer. In answer to your question, "Am I content that the White Paper has produced something that’s closely aligned with our original vision?", I think broadly yes. There are a set of trade-offs that have had to be made with respect to how much money is available and what else has been going on with respect to the benefit reform programme across Government. I think the broad thrust of what we were proposing has been replicated in the White Paper. The taper rate is slightly more severe than we had hoped for, but we were also very aware that, when we wrote the Dynamic Benefits paper, we were going to put one attractive option out there, but in the paper itself we set out a set of other options, realising that we were probably not going to be able to persuade the Government to spend as much money as we had proposed, but we wanted to show what could be done, and within the confines of the other options we proposed in the appendix of the report, it’s pretty well within that range; so broadly happy, yes.

Chair: So what are you not happy with?

Dr Stephen Brien: What am I not happy with? Well-

Q8 Chair: You can qualify that: where does the White Paper depart from the original vision?

Dr Stephen Brien: I think the biggest place where the White Paper departs is having a 65% taper rate rather than a 55%, because I think that it will have a fairly major impact on our ability to help people progress in work once they’ve entered work. But I think the good side of it is that we have protected pretty generous earnings disregards so that the initial incentive and award for entering work, even at lower wages, is protected.

Q9 Chair: We have some questions about the tapers later. Is there anything else that is different?

Dr Stephen Brien: I think there are minor issues, but I think broadly no, we’d be getting into a lot of detail if we went into those smaller points.

Q10 Mr Heald: First of all, in terms of the losers who are being identified in the longer term, have you had a chance to look at what the longer term behavioural effects of the policy might be, because obviously that’s quite an important aspect of Dynamic Benefits?

Dr Stephen Brien: Yes, we did at the time of writing the report, and most of that has now been replicated in a similar order of magnitude within the Department, and you can see that in the White Paper. The main positive dynamic effect will be hundreds of thousands of people entering the work force; we’ll have to get the economic recovery going, but given the timings I think that should be a good confluence. The second positive effect will be lifting large numbers of low-earning households out of poverty, and I think the third positive effect should be the steady erosion of the couple penalty, which indeed you’ve highlighted already as one group of more advantaged winners than others.

Q11 Mr Heald: And is it right that the losers who are identified are by and large families that would have been getting tax credits at the very high levels which the last Government introduced?

Dr Stephen Brien: They are. I think to pick up on Mike Brewer’s points, specifically he mentioned the 16 and 30-hour points. For those of you familiar with the Budget constraints, that’s the point at which the tax credit starts to become eligible for different family types. As a result it’s particularly generous at that point, and as a result, understandably, people have arranged their affairs around that financial benefit. So what we have are clumps of the population at 16 and 30 hours. As you try and create a smoother profile for people, so that 15 hours working becomes worthwhile and there’s a continuous progression, those two edges and corners are the areas where most of the losers will be.

There’s one other set of losers as well that I think is worth noting. Again, it’s a function of the tax credit system. It’s those who have reasonable amounts of capital and are receiving tax credits. What we saw was a lot of complexities within the system, but also a lot of inconsistencies, which I think were actually very important to address from a broader social justice point of view: the idea of those on the lowest earnings or even on zero earnings having a strict capital test, and then those, say, working 16 hours having a much more generous capital test, where the capital test was on their income from capital rather than a standard return applied to it at a tariff rate. So what we have done as well is standardise that approach, so that what you will find is there’s another group of losers, a third group of losers, 16 hours to 30 hours, and then those who have been benefiting from the tax credit yet having quite a bit of capital. That basically funds the progressive nature of the reform.

Q12 Alex Cunningham: I want to take Mike back to what he was saying earlier about the Government’s six months to determine who they were going to target specifically, and the lone parents seem to be bigger losers than most. Do we actually know what that looks like yet? How big losers are lone parents going forward?

Mike Brewer: Well, we drew attention to lone parents in our report because they were the family type that would lose on average in the long run, and others-couples with children, families without children-would gain on average in the long run. They lose mostly because of the withdrawal rate in Universal Credit, which is effectively higher than that which currently applies under tax credits, so Universal Credit ends up being fully withdrawn sooner than tax credits currently are. So, most of the lone parents who lose are, as the previous member suggested, reasonably well-off lone parents, although, as Stephen said, there will also be a few lone parents with large amounts of capital who lose out. I’m afraid I haven’t got the figures in my head about what the average loss is, but as I say, why we draw attention to this is because they were the group that lost, on average. But again, as I said earlier, within lone parents there will be winners as well as losers; lone parents working fewer than 16 hours are very likely to gain and a great many lone parents will find that their incentive to work has strengthened from Universal Credit and their incentive to earn more has strengthened.

Q13 Chair: In the existing system, because of the 16-hour cut-off, was there already a behavioural shift that people were working 17 hours because that was maximising their income, and therefore they are likely to be the biggest losers?

Mike Brewer: It’s very clear evidence that tax credits affect the way that lone parents behave in the labour market; undoubtedly yes. We’ve shown in previous research that lone parents are particularly unlikely to work fewer than 16 hours compared with other family types. 15 hours a week is a reasonably common choice for people to work in the economy at large, but almost no lone parent will work 15 hours a week. Instead there is a large clump at 16 hours a week, which you don’t see for any other group. Yes, tax credits definitely affect lone parents’ behaviour; that’s unsurprising given the size of the cliff edges that Working Tax Credit causes. So yes, as you were saying, as there is a group of lone parents at 16 hours, and, as Stephen has described, those people are quite likely to lose, that is another reason why lone parents are losing on average.

Q14 Chair: But coming back to saving, the whole point of the dynamic benefit is that behaviours will change as a result, so are we going to see lone parents, as a result of these changes, working longer hours in order that they can maximise their income because they’re going to be losers at 16?

Mike Brewer: Yes, indeed, and some of these lone parents working 16 hours on a low wage who will lose on Universal Credit might find that their marginal withdrawal rate falls to almost zero from a much higher rate now. So yes, certainly there will be behavioural responses.

Chair: But if they’re working longer hours there’s challenges about child care and where the child care element fits into all of this, which is a question I think for our next set of witnesses.

Q15 Glenda Jackson: Really it’s to both Dr Brien and Mr Brewer. You speak of families and Dr Brien spoke of households. Has the Government actually defined what it means by "family" and "household", or is it just based on the kind of work patterns as they exist at the moment within the benefit system? Because there is a big difference, in my view, between a family and a household, and the household may, in fact, be in as much need of the benefits system as a family.

Mike Brewer: I was using the term to refer to a set of people that are treated as one by the benefit system, so an adult, their partner and their dependent children. That was the sense in which I was using "families". I imagine Stephen was using the term also fairly loosely as well.

Dr Stephen Brien: Yes.

Mike Brewer: The Universal Credit will look at the concept of a family that the benefit system usually looks at: a person, their partner and their children.

Q16 Glenda Jackson: Don’t misunderstand me. I wasn’t querying your choice of semantics; I was actually trying to dig out what the Government’s approach was. How does the Government define what is family? Does it also attempt to define what is household? From what I’ve read, they keep talking about families all the time, but a household can be as vulnerable as a family. Is it your perception that they did target a particular definition in that way?

Dr Stephen Brien: The benefit system today and Universal Credit is based around what the Government calls a "benefit unit"; it’s a rather technical term, but that’s why we loosely use "household" and "family", because it’s a lot more accessible term. But a benefit unit is precisely as Mike has defined it: it’s adults and dependent children living under one household. If there happens to be a lodger in that household, that lodger is not part of the household for benefit terms. If there is an adult child, likewise. It’s the core economic unit. It’s trying to find that nexus of the core economic unit. That is the entity that needs to be provided with the support. So that’s the sort of unit that the Government’s been working on, it’s one that is the historic definition. To my knowledge, there are no plans within this reform to change that definition. There may well be tweaks around the edges, but no substantive reforms to that definition of what the unit is that has money channelled to it.

Then to your question whether there are specific biases or preferences within Government policy to help one versus the other, let me just say what we proposed at the time and you can draw your own conclusion then about where they’ve gone. Benefit units that comprise two adults, versus one adult, and particularly families-i.e. with kids-we advocated that they should be greater recipients than they are today because of a couple penalty that we identified, and there’s clear evidence that lower-income people were less likely to form couples and the pattern of that correlated with the incentives in the benefits system. The other group that we were particularly keen were helped were low-earning young people, for the very reason that, first of all the absence of accessibility to the Working Tax Credit for those under 25, the high withdrawal rates and the long-term effect of that group not getting on to the labour market at an early age, they were, certainly for us, the CSJ, another priority group.

Q17 Chair: Patrick, is it fair to say that, reading Reform’s submission to the Committee, you’re a bit more cynical about how this is all going to work, and international experience suggests they’re coming up with a good idea but actually in practice it’s much more difficult to see through?

Dr Patrick Nolan: I think that’s right, and it’s not just the international experience. This is also not a new idea for the UK as well. This has been investigated by this Committee in previous Parliaments as well, so it’s particularly not a new idea, and I think it’s important to make that point, because the risk that we can have with the discussion that we’ve been having is that we can be quite precise, but we can also miss the point, in the sense that this is £1.7 billion of spending, according to the IFS numbers, or maybe £2 billion. The question we have to ask is: is this value for money? In particular, Mike mentioned the large cuts that are being made in other parts of the welfare budget, so we have to balance this £1.7 billion of expenditure against those other cuts, the cuts that we’re making in other budgets as well, the need for increased taxes, so we have to put this into the public finance context as well.

If we start to look at it in that perspective, then you do have to say we’ve been here before and we’ve discovered that this isn’t actually workable. We’re already seeing a lot of difficulties with the use of the PAYE system just for people to pay tax or to work out people’s contributions to pensions. How is this going to work when we are also trying to roll the welfare system into a computer-based PAYE system? That’s just to give one practical limitation.

So we do approach it from a relatively sceptical point of view, and I guess the reason we feel quite strongly about that reform is that it’s not just the money but there’s also the opportunity cost. There’s no doubt that we have to do something about welfare. We do have to make it easier for people to work and we do have to make the system as a whole fairer, and the concern that we have-and this is speaking as someone who’s not just the chief economist at Reform but someone who is a civil servant in New Zealand and worked on similar things- is that we spend a lot of time trying to develop this Universal Credit when we could be doing better things with our time and better things with our money, because we do actually have to fix the welfare system and I do not think this is the right fix.

Q18 Chair: Can I ask you and Stephen the question I asked of Mike: that in order to make the Universal Credit work, in order to fulfil the Government’s promise that there won’t be any cash losers, then there has to be fairly swingeing cuts in benefits before Universal Credit is set up?

Dr Patrick Nolan: Again we have to always go back to-it’s the former civil servant speaking in me, I guess-objectives and what we’re trying to achieve, and I’m always cautious about policies that set out to avoid any losers, because actually sometimes that’s the point of the reform, because sometimes what we’re trying to do is we’re trying to send a signal to people that lifestyle on a benefit, in the long term, may not be as rewarding as it has been, and so we do have to create losers. That’s never something you should do glibly, but sometimes you actually do have to bite the bullet and you do have to create losers.

Now, as Stephen mentioned as well, you also have to see losers in quite a dynamic sense. A lot of the measures we do, simply because of the limitations of the computer models, the discussions we’re having-these are estimates; these aren’t facts that we’re talking about. We all know, and I’ve used microsimulation models a lot when I was a civil servant, and I remember being hauled in front of Ministers to explain why, before reforms, we undertook estimates of winners and losers, and after the reforms, the numbers were completely different. Well, it was because the modelling is always limited. I do think the IFS and the CSJ have to be congratulated for doing this work, though, and it is important that we have these estimates, and it’s disappointing that the Government hasn’t been publishing more of these sorts of estimates, but they’re always limited.

Chair: You’ve always got the problem that you can’t model human behaviour, necessarily.

Dr Patrick Nolan: You can’t model that, but again, an important part of rational policy advice is to have more information, but we always have to have that caveat that these are estimates and not facts, and when it comes to trying to model behaviour it’s particularly difficult, particularly because the way that people decide to work is not just an individual decision; it has to be put into the context of the labour market, and this is one of the things that we don’t understand.

Now, we know that, for example, a lot of lone parents who leave the benefit do quite heavily go on to full-time work if they exit the benefit. Something like 50% of lone parents who leave the benefit, based on a DWP 2004 statement, go into full-time work and only about 1% into part-time work. Now, the question we have is: is that because of the incentives in the system, or is it because of something in the labour market; the fact that to be able to cover your child care costs you really need to be going into full-time work?

We have to understand not just the incentives on an individual level or the microsimulation thing; we have to put this into the context of: how are employers going to respond to this? How does it fit in with current patterns of labour demand? All those other sorts of questions. Now, the concern that we have about the White Paper is that there’s no indication that any of those questions have been looked at.

Q19 Chair: It’s assuming there will be losers-that’s the point of the change-and the Government should be more honest in saying there should be losers rather than the promise that there won’t be any cash losers.

Dr Stephen Brien: I think you need to look at it in context. If you’re willing to spend the money that we proposed-I mean we set out a design at the CSJ that deliberately set out to have no losers, and accepted the costs of that in order to put something down on the table so that the debate could focus on the principles and the costs rather than winners and losers. We also were very clear that there are plenty of other trade-offs about how much money you want to spend on that and different ways of creating different types of winners and losers within the broad principle.

Now, I think when you then look at what the Government has done and the context in which the Government is doing it, it becomes a little bit more complex, because it’s not just a case of: can we find a cost-neutral version of Universal Credits? It is in a context of, "We also have chosen to make quite significant cuts to the overall benefit bill." Now I think you have to say to yourself, "How do I want to do that, and am I trying to get those cuts to the benefit bill, which are fundamentally cost reductions, aligned with the broad purpose of the Universal Credit reform as well so that we can say that while cutting costs, we’re also trying to increase incentives to work?" Then I think you can make some arguments around two major parts of the benefit cuts. For example, the overall cap on benefits is one that only applies to those not earning. Whatever the discussion around the merits or demerits of a cap on benefits, the structure’s very much sympathetic to the overall design, because it says if you’re working, that cap doesn’t apply. So actually there’s quite a significant incentive for those with large families to enter the labour market that doesn’t exist today.

I think at the top end, again, whatever you may say about the manner in which the child benefit is going to be withdrawn from higher earners, the principle of doing that aligns with the progressive nature of what we’ve been aiming for. But it’s a very particular type of progression, and I know that Patrick will be more than happy to see the child benefit come down as we’ve discussed in public before. But I think the progressive nature of it is also very important, because typically, with most of these reforms when they’re analysed progressively-and both parties have criticised the Government-there is this rough view that you get from the deciles, but the progressive nature that we’re providing in our report, and I think the Government is working on mostly, is to say, yes, it’s low earners who are going to gain-it’s not the low income, i.e. zero income who are going to gain-and it’s a very particular type of progression. I think that’s a key part of it, so that you’re saying to people, "If you are on low earnings, you are going to be much better off than you used to be. If you have no earnings, actually that is where you are going to be hurting a little bit still. But, the reward is, if you can’t get into work, you can make up most of those cuts, and if you’re a slightly higher earner, medium to higher earner, receiving benefits is probably socially not the right thing to do and not the most effective use of money." So we’ve brought the money together into that focus point of low earners.

Chair: There are obviously questions about the labour market, but we’ll leave that.

Q20 Harriett Baldwin: My question is to the IFS and it’s about the transition protection. Does the transition protection protect every group of people from any cash loss when the Universal Credit is implemented?

Mike Brewer: The Government has said that existing recipients of benefits and tax credits will be protected at the point of transition in cash terms. I think what that means is if an existing recipient is moved across to Universal Credit and then things change, then this transitional protection might not apply. Say their circumstances improve, maybe they will then face the correct entitlement of Universal Credit. It’s also a cash protection: as time goes on, inflation will erode that cash protection, essentially. I don’t know the answer; I’m very keen to know-maybe the Government will tell us when the Bill comes out-how long they think this will last. My feeling is it won’t last that long for most families because family circumstances do change quite frequently and obviously, as I say, inflation will erode that cash protection. This is mostly an issue for working families, of course. Families who are out of work and have no other sources of income should get the same Universal Credit as they get in the current system. So this transitional protection is mostly going to be applicable for families in work currently receiving tax credits.

Q21 Harriett Baldwin: So, in the roll-out of Universal Credit, are you saying that there are no cash losers as far as you can tell?

Mike Brewer: I’m just reciting to you what’s in the White Paper. The Government said, "At the point of transition, no family will lose in cash terms." That’s on the day they transit. What happens after that, the Government can’t give any promises. It seems like if their circumstances change, and that’s going to be quite common for working families, to see their circumstances change, then they may well lose under Universal Credit.

Harriett Baldwin: So, you spoke about the long-term cash losers didn’t you, when you were talking about losers; this was over the long term after transitional protection had-

Mike Brewer: Yes, indeed, exactly, or in a world where all recipients of Universal Credit were brand-new claimants. Anybody who would want to start a new claim of benefit when Universal Credit comes in will have to claim Universal Credit, and they will be losers in the sense they will get less Universal Credit than they would have got under the previous system. No, our main analysis and the numbers I read out earlier was about the long run, when the transitional protection had gone away. In our report we do provide some estimates of the gains with this transitional protection, assuming that all families are protected. But that’s also unrealistic, because, as I said, this transitional protection will gradually fade away as family circumstances change.

Q22 Harriett Baldwin: Is it possible that relatively small changes in family circumstances could trigger a change in the transition protection? So, for example, if you’re a lone parent and you move into a couple relationship, would that trigger a change in the transition protection?

Mike Brewer: I don’t think the Government has set out quite that detail but I would imagine that would certainly count as a change of circumstances. What I’m less clear about is whether a change in earnings would count as a change of circumstances. I’m almost certain a change in family type like that, which at the moment would trigger a new claim for tax credits, would count as a change of circumstances, yes.

Q23 Harriett Baldwin: But in conclusion, on this transition protection issue, when your report says that 1.4 million stand to lose out, that’s only assuming that there is no transition protection?

Mike Brewer: Absolutely, yes.

Harriett Baldwin: So without transition protection , there are no losers as far as the IFS can tell?

Mike Brewer: Yes.

Chair: I think we will move on, because we have got bogged down in what was effectively our first line of question s . We now have questions on tapers.

Q24 Stephen Lloyd: Dr Brien, starting with yourself, does the Government’s proposed taper level of 65%, compared with the 55% that you put in your proposal, provide sufficient incentives for people to take on work or to increase their hours, or does it in your view cause a real problem? Bearing in mind, as you’ve already mentioned, we’re obviously under particular financial constraints, so the Government can’t perhaps go quite as far as it may want to, but do you think the 65% taper is a real problem?

Dr Stephen Brien: I don’t think it’s a real problem, and let me break that down into a number of things. One, it won’t have a dramatic effect on the incentive to enter work, because the main financial reward comes from the earnings disregard as opposed to the taper rate. If you then break down the population of low earners into two groups, those who are currently in receipt of Housing Benefit will under Universal Credit have a much lower net withdrawal rate than they do today: under 65% or 55%. So those in receipt of Housing Benefit will be given quite a significant incentive anyway. Going from 95% to 65% as opposed to going from 95% to 55% is not that material because the bulk of the improvement will be there for them.

The group that are low earners and are currently not in receipt of Housing Benefit, so they either own their own home or are mortgagors, they run the risk of actually having a slightly increased net taper rate. They will benefit from the earnings disregard and they will benefit from the simplicity, but they would have a slightly increased net taper rate. So that’s the group that one would say, 55% versus 65%, there’s a slight risk of them not working as many hours or as high earnings as they might possibly have done, under the new regime. However, that’s the group at the moment that I think one would be least worried about. Given the way they have set up their affairs, they have demonstrated that they are the ones working the longest hours today among low earners.

Q25 Stephen Lloyd: So in a sense one might say that in the perfect world it would be nice for that group to equally benefit, but culturally, or for whatever appropriate reason, they actually, one might say, have that work ethic; they’re just unfortunately consequently not benefiting as much as those who perhaps have got stuck in the benefit trap and don’t have the cultural ethic.

Dr Stephen Brien: Correct, and the comparative difference in work ethic may also be a legacy function of the structure of the existing benefit system anyway.

Q26 Stephen Lloyd: Do you have anything specific to add to that, Dr Nolan?

Dr Patrick Nolan: Again, we have to be careful about having a discussion that’s too precise but also misses the key points. The way I always view abatement is it’s a bit like a balloon, and effectively what you can do is you can squeeze the balloon downwards or sideways and you move the abatement around. That’s all you can really do with the benefits system, because the more you put in, in terms of the more you spend on the benefits system, you always have to abate it somewhere else. So you can’t ever avoid the problem of abatement, and we can go all the way back to Beveridge’s 1942 paper. This is the stuff that he worried about as well. There’s no actual way of avoiding disincentives somewhere in the welfare system. The concern that we have at Reform is, if we go back to the balloon analogy, sure you can try and squeeze the balloon, so you lower the disincentives at one point, but you’ll simply push them up somewhere else in the income distribution.

Now, the concern we have is, if you spend more money through the welfare system, you effectively make the balloon bigger, so you might squeeze it down, but you are going to have disincentives further up. This approach of trying to get around disincentives by spending more through the welfare system, well, we tried this with tax credits, and this is where we are now, and now we’re going to try this again with Universal Credit. So this is an approach of trying to avoid a trade-off that you can’t avoid, through spending money-that has actually failed before.

Now if we go back also to my earlier points about seeing this in the context of the labour market, as the IFS have shown, if you take the case of a lone parent on about £6.50 an hour with two kids, the incentives are better for them to work part time up until about 16 hours a week. Now, the question we have is: do those people want to work those hours and are the jobs there? Because if you look at the exits from benefits, lone parents are going into full-time work. Now, that could be a consequence of the benefits system meaning that people don’t work part time, but there is a big question there that we haven’t actually answered. We don’t know if these programmes and these incentives will actually work in the context of the labour market.

Q27 Stephen Lloyd: I appreciate that. However, the basic principle of having the taper at 65%, as opposed to up to 95% or even 100% under current benefit systems-I would assume that you would agree that that would be the right direction of travel, if not the only direction of travel, whether or not it goes as far as perhaps you would like?

Dr Patrick Nolan: There is a lot of economic research on this, and the question is: is it better to have very high abatement at a very-the trick is, if you have very high abatement then people can leap over it at quite a short number of hours. So if the abatement takes place over five hours but at a very high rate, then people have a choice of increasing, say, if they get a job that means they can work 10 more hours; they just simply leap over the abatement. If you have a broader abatement it’s harder for people to leap over it. So there’s actually no definitive answer as to which is better-a high or broad tower-because all you’re doing is shifting the disincentives around. So that’s why I keep going back to the labour market context, because we have to know where the jobs are, what hours people are working and also how responsive people are to incentives. Different people in the population respond to incentives in different ways, so we also have to take some of these factors into account.

Stephen Lloyd: No, I appreciate that, and thank you for that. Dr Brien?

Chair: Can I just stop you there? I am conscious of the time, and we only have an hour. I’m going to move on to disregards.

Q28 Karen Bradley: We’ve heard that the earnings disregard actually might have more of an impact on incentives to go into work than the taper rate. Dr Nolan, at Reform you’ve argued that changes to the earnings disregard are a relatively ineffective way of increasingly labour supply. Can you give a bit more information about that?

Dr Patrick Nolan: It might seem counterintuitive, but this is based on a lot of the research that has been done in the United States by people like Rebecca Blank, and the United States is interesting because they had the very big welfare reforms, the Temporary Assistance for Needy Families ones, but because it’s a federal system all the states effectively tried to do different things with their disregards, so they’ve effectively got a good natural experiment. One of the things, and this is what Rebecca Blank was quite surprised about, was that it was relatively ineffective at encouraging people into work, and for two reasons. One, she notes the complexity, and so people don’t necessarily respond to incentives in such a perfect way because they don’t understand them or because it’s quite hard for them to see how it will affect their incomes. Also, what it means is it might make work rewarding for a couple of hours a week, or it might make working for five hours at a low wage attractive, but a lot of people don’t go into those jobs, and so for those people who can enter work above the point of disregard, they’re not getting any benefit in the impact of reduced marginal tax rates. So they’re not actually benefiting in terms of those incentives in the way that you’d expect.

This is why-I probably sound like a bit of a broken record-I keep going back to that labour market context, because often we assume that people can work for one hour and then they might get another hour’s work, and that’s the way a lot of the modelling is done. But in reality, we know that people jump around between different states. People will jump into so many hours of work; they might work for five hours and then suddenly they’ll leap up to 40 hours’ work. We know that the labour market operates in quite a lumpy way. So this is why some of the fine tuning of incentives isn’t actually necessarily the best approach. We have to think a bit differently about this.

Q29 Karen Bradley: So you’re not looking at the people who are offered an extra three hours’ overtime; you are looking at people being offered a different job or going from no work into work and actually the earnings disregard-

Dr Patrick Nolan: The disregard is for the first few hours of working at a household level. So in terms of the reduction in marginal tax rates, that’s where it has its impact. Above that, sorry for the economics here, but you don’t get the reduction of marginal tax rate, but you’ll get an income effect that may or may not encourage work. So from a purely theoretical perspective, you’d expect the results of a higher disregard to be mixed, and that’s actually what the literature shows, that they’re probably not that effective.

Dr Stephen Brien: Let me paint two pictures of the labour market. I think Patrick brings up some valuable points in respect to that. Let me go back to the world of Beveridge; a world where it was predominantly full-time, mostly male employment; a world of lower out-of-work benefits. In that world it’s quite easy to set up a system, much as was done at the time, of very high withdrawal rates of the benefits because if the male was entering work, could get into full-time work, and in effect jump over, exactly as Patrick has described, the benefits system, the taper rate, whether it was 100% or 90% or 50%, was quite immaterial because anybody in work was basically well over that, because also the actual level of benefits itself was low.

Shift forward 60 years and we have out-of-work benefits that are much higher, much more generous, and we have a labour market that is much more diffuse. As a result of that, that paradigm has to be challenged and has to be reviewed. What you have therefore is a system of saying, "How do I find a regime that works so that those, five, 10, 15-hour jobs are accessible to those on benefits?" That’s why I think we have to have a different approach. It may be costlier, and we’re certainly not going to be able to fine-tune it, but if we can get it roughly right we should be able to get the dynamic effect working so that those who are potentially going to earn low wages will be better off in part-time jobs and therefore can move in. That’s one of the reasons why I think you need to have fairly generous earnings disregard, not because it’s going to provide all the incentive and do everything.

Think about it more as about removing obstacles. There’s a lot of push, there needs to be a lot of active labour market effort to help people, coach them, help them move into jobs. There needs to be cultural and social change, but also we need to say, "Okay, what are the obstacles to getting into work?" You’re not going to be better off. Well, let’s make sure that you are better off. You can’t afford your child care. Let’s make sure that’s available at an appropriate level, etc. I would say think about the earnings disregard as significantly removing one of the big obstacles, so that that first leap in is as rewarding as possible. Once people are there they are more secure and it’s easier to have a slightly higher marginal tax rate going on once people are in a job to progress. The first most difficult step is the one that we have to give the biggest reward to.

Q30 Karen Bradley: So this is an idea to help people into work in the first place; it’s not so much the incentive for people who are already in work to go from five hours to 40 hours, for example?

Dr Stephen Brien: If we go back to the original report and the work we did, the primary issue that we were trying to address was the trap from out of work into work. The second-order issue was progression in work, but the first-order issue was: how do we remove the obstacles to entering work? All the research that we were seeing from a social point of view was workless households is the big problem, because that is not just an income issue; it creates a whole load of other social problems as well. If we can get more people into work, even if it’s only five, 10, 15 hours a week, if each householder has one earner it creates a whole new society.

Q31 Mr Heald: As Dr Nolan mentioned the labour market, I want to make the point that these sorts of benefit policies help to create the conditions for flexible employment, which is a very important part of our labour market.

Dr Stephen Brien: Absolutely, yes. I know it was a difficult fourth quarter in the economy, but if you look at the type of jobs that were being created during that fourth quarter, they were predominantly part-time jobs. We are having a transition that is continuing in the labour market, and I think we need to make sure that, if that is what employers are looking for and if they are saying we are going to take ourselves out of recession step by step by step, the labour force is also able to enter the labour market step by step by step.

Q32 Glenda Jackson: Just what were the regional examinations that the Government put into this, because there are enormous regional variations of people being not in work and actually getting into work? If I simply look at London then you’re looking at Housing Benefit: one of the reasons why most people say to me they can’t take work is that the rates of rent are infinitely higher than they would be in other parts of the country, and we are looking at a time when wages are going to stay very low. So are those regional variations part and parcel of the Government’s thinking, because the Universal Credit is set at an absolute for the whole country?

Dr Stephen Brien: I can’t speak for the Government’s thinking today, but our thinking at the CSJ was to say most of the regional variations that are required come through the gross award, which is factored through the Housing Benefit levels being different in different parts of the country. So the amount you need to live on if you have no other source of income in different regions is very different, and that is predominantly reflected through levels of Housing Benefit, rather than saying we should have different taper rates or disregards within different parts of the region. That may well be an argument to do that as well. I think that starts to add greater complexity.

Q33 Kate Green: The question I’m asking as a result of the last couple of sets of questions is: what estimate has been made of the effect on in-work poverty?

Dr Stephen Brien: We made some estimates, but I think the Government has also published in the White Paper quite a bit on that.

Q34 Kate Green: Following Karen’s argument, it gets people into work; it doesn’t help them progress. In that context, what does in-work poverty look like?

Dr Stephen Brien: In-work poverty would be dramatically reduced under this system, because families, households, benefit units that are in work and in poverty are mostly those who are currently not accessing the Working Tax Credit, and because of the nature of the earnings disregards, that group that are currently under the Working Tax Credit threshold are those who are the biggest gainers. So the vast bulk of the poverty reduction that has been cited in the White Paper is from in-work poverty, and from that particular group of low-wage earners working on low hours who are currently doing the right thing but are not being credited.

Q35 Karen Bradley: One of the issues that’s come up on the earnings disregard is about the under 25s, and clearly youth unemployment is a big issue. I know the CSJ and Dynamic Benefits did suggest that there should be an earnings disregard for the under 25s, but the Government have not put that forward. I’d just like your views on that please.

Dr Stephen Brien: Cost.

Dr Patrick Nolan: But also we have to look at the people that are quite responsive to these things. We know that participation, particularly of younger males, is relatively sensitive to financial incentives-you wouldn’t want to provide the disregard because we can encourage those people into work quite easily. To go back to the flexible labour market point as well, and I guess a related point, we have to think practically about how these things work, because while it might seem like a simpler system or a more flexible system on paper, the reality is it’s going to be harder for employers, because now a lot of these people who would be working below the tax threshold will now have to be rolled into the PAYE system. So we have to move beyond how these things look on paper to think about how they can be implemented in practice, which comes back to the cost point that Stephen mentioned.

Mike Brewer: The previous Government decided not to give Working Tax Credit to the under 25s because it thought that most people under 25 have a low income only temporarily. I remember from modelling we did almost 10 years ago that it would dramatically have increased the cost of the Working Tax Credit had it been given to under 25s who worked less than full time. You have a whole body of students working part time, for example, and it seems odd for the Government to support them when they’re working. So I don’t have strong views either way.

Chair: We now move on to other incentives.

Q36 Andrew Bingham: We’ve talked about the reluctance of claimants taking on the risks of going to work and more hours, but there are other key barriers such as child care costs, work associated costs, transport, etc., passported benefits. What does the Government need to do to address those? Start with Mike, because he’s had a bit of a quiet time.

Mike Brewer: The White Paper was fairly quiet on most of those issues. The Government is almost redesigning from scratch the way it supports child care and hasn’t said what it wants to do about passported benefits. I agree though, those are part of the issue of whether you work or not at all. What the CSJ focused on or said was the most important thing is to make sure that work pays more than not working, and we’ll worry a bit less about your incentives to earn more when you are in work, and I made a similar argument in an earlier work. Really you should see passported benefits as being part of that decision; they mostly affect the decision about whether you work or not. Families with children say, "I’m going to lose my free school meals, so why should I leave Income Support?" The Government needs to come up with an answer and hopefully one that is reasonably transparent. There are various technical ways of getting around the issue of passported benefits. You could cash them out; you could make them available to more families, which the previous Government suggested and this Government decided not to do. Child care as a whole is a completely different issue, and the Government, as I say, is essentially designing from scratch the way it supports child care. It seems to want to support more families with the same amount of money, so something will have to give somewhere and it’s quite sensibly, in our view, looking at the way in which the child care tax credit is administered.

Dr Patrick Nolan: I think Mike’s point about perhaps cashing out passported benefits is an interesting one in the sense that what we have to be careful about is simply trying to simplify the system and layering in all these additional complexities as a transitional measure, because they tend to persist in systems. We can talk about the child care costs, but as well as that there’s also the bigger question of: are we always going to make it so that work will always pay if we take into account all the costs of working? Well, probably not. Is it the role of the welfare system to do that? I don’t think it is solely the role of the welfare system. Sometimes there’s a cost of working and sometimes individuals and families have to take some of that responsibility on themselves. The flip side of providing a welfare system that does a pretty good job of providing for people and ensuring that poverty doesn’t go too high is that individuals and families have to take some responsibility; if work’s available and it’s reasonable then they have to also consider it and take it on and face some of these costs, because it’s better for society and it’s better in their long-term interests as well. So I don’t think we can ever devise a system that’s going to compensate people for every single in-work cost and neither do I think we should.

Q37 Andrew Bingham: I’m conscious of the time, so before Dr Brien answers that one, can I just ask you that in the Dynamic Benefits report you talked about the couples penalty, the disincentives of marriage and people cohabiting. The White Paper says that it will be assessed on a household basis. What are your views on that? Disappointed or accepting of it?

Dr Stephen Brien: I’m not too sure I see the distinction you are making in the question.

Andrew Bingham: Well, as opposed to-it will be acknowledged it is done on a household basis individually, almost. Do you think that’s a better system, or do you just acknowledge it per se?

Dr Stephen Brien: I think it’s pretty well what we were proposing. I think the Universal Credit should be developed on a household basis because that’s the fundamental economic unit that needs to be supported. I think the next question is: what should be the relative generosity for a household that has one adult versus two adults? I think that’s where we were saying that historically the two-adult household has lost out versus a one-adult household, and as Mike said, I think part of the Government’s shift is to increase the comparative generosity for two-adult households, which we would support and we endorsed at the time.

Q38 Chair: Can I just ask one last question of you all? Is it a case that the White Paper has done all the easy stuff, and all the difficult stuff-the child care, the passported benefits, the disability premiums-still has to be decided upon, and once those things are decided upon it could skew everything and some of the withdrawal rates could be over 100%?

Mike Brewer: It is certainly the case that the White Paper has not addressed some of the more difficult technical fiddly issues of designing a new benefits system, and those fiddly difficult technical issues might well lead to some groups complaining very loudly that they are losing quite a lot of money. In that sense they have done quite a bit of the big picture stuff. Of course the most difficult issue the Government has facing it is to actually implement this thing, as Patrick was saying, which was something that we didn’t cover in our report at all.

Dr Patrick Nolan: In a word: yes. I would probably put it a bit more strongly than the way Mike did, and I think it really has avoided the decisions and the choices and the trade-offs that are central to this reform. You can’t say it’s just a question of designing it on paper and then implementing it. Implementation is the key game, and this thing has to work, and this is why it hasn’t worked overseas and it hasn’t worked when it has been looked at here for over 20 years already.

Dr Stephen Brien: I would say that the White Paper sets out the direction of travel and gives enough principles whereby the next set of knotty issues can be worked through. I think Mike was right to say there is still a fair bit of work to be done on these, but I think we have a framework and a set of principles in which most of those decisions can be made, even though the details need to be worked through, and absolutely, I think implementation is very much the next challenge, although I have a more optimistic outlook than Patrick on that.

Chair: And our next set of witnesses have been chosen specifically to address some of these difficult issues, so can I thank the three of you for coming in this morning. It has been very interesting and was useful. Thanks a lot.

Examination of Witnesses

Witnesses: Ms Emily Holzhausen, Director of Policy and Public Affairs, Carers UK, Mr Sam Royston, Policy and Campaigns Officer, Family Action, and Mr Jim Vine, Head of Programme, UK Housing Policy and Practice, Building and Social Housing Federation, gave evidence.

Chair: Welcome to our next set of witnesses. As you’ve just heard, the reason that you’ve been invited is that you actually represent organisations that represent the range of things that perhaps have not been decided upon with regard to the White Paper and Universal Credit, and hopefully with the evidence session we’re about to have, you will be able to either shed some light, or perhaps shed some shadows, on the things that still need to be decided and some of the pitfalls that Government could find itself in if it doesn’t come up with the right decisions on that. So we’ve some questions on claims, payments and administration.

Q39 Kate Green: We were just talking a few moments ago about the challenge of implementing and administering this new benefit. I wonder if you could comment on some of the new ways in which it is proposed the Universal Credit will be claimed, paid and administered, and any of the pitfalls that you might see in relation to that? Perhaps we will start with Sam.

Sam Royston: Yes, absolutely. There are some concerns about delivery that we have identified. One is a problem with what will happen if there are problems with the delivery of the Universal Credit. At the moment, you receive a package of several different benefits, which means that in some cases, if there is a problem with one of your benefits-for instance it stops being paid-other payments of other benefits can continue. I spoke to one Family Action service user just the other week who had her Housing Benefit stopped. It did affect other benefits at a later point, but initially, at least, other benefits carried on being paid. We’re very concerned that once you roll benefits together into one lump sum-so you are having your Housing Benefit, Council Tax Benefit, Child Tax Credit, Working Tax Credit, all paid together-there would be the risk that one benefit stopping would lead to all benefits stopping, leaving aside those that are currently outside the system, like child benefit and Disability Living Allowance. That would be absolutely catastrophic for families if they had all of their money or almost all of their money stopped. They could potentially be left with almost nothing to live on.

Other issues around that: we’ve also identified issues with whom the benefit is paid to. I know that a number of organisations, for instance Fran Bennett at the University of Oxford, have identified concerns about benefits not being paid to the main carer, and again, it’s to do with the whole of the Universal Credit being paid as one lump sum. If it’s paid, for instance, to the main earner, there’d be what is known as "wallet and purse issues"; that the money is not necessarily being kept or spent by the main carer-that is, intended to be spent on the child or children in the household-and that’s also a concern. Those were two key concerns we had.

Kate Green: Any other comments or concerns from other witnesses?

Emily Holzhausen: No, nothing. The appeals system really, just to build on Sam’s point, is absolutely critical and it’s not clear in the Paper. But we support what Sam has just said.

Q40 Kate Green: Do you have any comments on the proposal to move to monthly payments?

Sam Royston: Sorry, yes, that was another thing I had. Family Action work with a lot of people with quite severe mental health problems, and in many cases people have expressed problems to me already that the payment periods are often too infrequent, which can lead to budgeting problems, problems of people getting into debt, and that is often connected with budgeting problems created by mental health problems directly. We are concerned that the move to monthly payment periods under the Universal Credit would exacerbate these problems and lead to potentially worsening people’s problems of debt and things like that, problems with budgeting, and probably put extra pressure on Family Action service providers to help people with budgeting correctly in difficult times.

Jim Vine: In terms of the housing side of things, BSHF’s a housing research charity, and we are, I think, in the shadows, as you’ve indicated. There’s about one page on the whole of the housing component in the White Paper, which doesn’t provide a lot of guidance to work on. But on the actual payments side of things, I think what would be important would be to retain the option where appropriate of having direct payment to landlords for vulnerable tenants in the private rented sector, and in the housing association sector as well, to retain the credit rating, so there’s the tenant-side protection and the viability of the organisations for the housing associations.

Q41 Kate Green: Can you see that that can be possible in the design of Universal Credit as we presently understand it?

Jim Vine: I think there’s a huge design issue still to be done. There’s a lot of complexity in getting that straightened out. The detail that we have on the housing component so far is very basic.

Q42 Kate Green: That leads me to my final question, Chair, which is picking up a point that Family Action made-in your submission, Sam-about firewalling the different components of the benefit. I wonder if each of you would like to comment on the potential advantages of that, some of which I think you’re hinting at, but also on whether there isn’t then a danger that we contradict the objective of simplification?

Sam Royston: I think our key response to that would be that simplification is important, but there have to be overriding concerns, and I’d suggest that one of those overriding concerns would be concerns about people being left with nothing in circumstances where there’s a problem with their benefits. It does not seem necessarily to lead to tremendous problems. Having thought about the possibility of that question, I think that one possible response to that in terms of delivery would simply be to make sure that under the Universal Credit the conditions under which the benefits are paid are essentially kept separate within the computer system, so that there are your conditions for receipt of Housing Benefit or the housing component, there are conditions for receipt of the child-related components, and as long as the information is correct and up to date for those individual components, they would continue to be paid. So, for instance, if there was a problem getting birth certificates, the child component might stop for a while, but the housing component might continue. If there is a problem with working out the amount of rent, some problem with the landlord, the housing component might stop but the child component would continue. It’s very important to firewall them in that way. I don’t think it will necessarily add a great deal to the complexity.

Kate Green: From the client’s point of view.

Sam Royston: From the client’s point of view.

Q43 Stephen Lloyd: This is directed to Carers UK. The White Paper is not clear on what changes to Carer’s Allowance might be under consideration. In your view, what changes to the Carer’s Allowance do you believe will be necessary to take account of the introduction of Universal Credit?

Emily Holzhausen: Thank you very much for asking that question, and carers themselves have been asking that question as well, having read the White Paper.

Stephen Lloyd: I have received numerous letters on it.

Emily Holzhausen: Yes, I’m sure you have. If I can just explain about Carer’s Allowance, it’s a nonmeans tested benefit and it’s incredibly important. It’s the only thing that carers really have in the system to recognise what they do: quite often giving up work to care for somebody that they love. What would currently happen with the system as we would see it is that about 255,000 carers currently get Income Support alongside Carer’s Allowance, and they would go into the Universal Credit, and we see that there are a number of advantages of that. There are certain caveats: for example, your earlier experts talked about earnings disregards, and it’s not clear where the earnings disregard for those carers would be in Universal Credit, and it’s actually a good opportunity to perhaps increase earnings disregards for carers and give them more opportunities within Universal Credit. We would certainly like that looked at. So if we move half of the carers on Carer’s Allowance into Universal Credit, what happens with the other half? The White Paper is not clear on that. We believe that they should stay outside of Universal Credit, because-

Stephen Lloyd: The whole Carer’s Allowance?

Emily Holzhausen: Yes, the remaining 245,000 carers, it’s vital they stay outside, and the reason for that is, if you take them in, you will means-test Carer’s Allowance, which I have to say would be an enormously retrograde step. Now having fought for the reform of Carer’s Allowance-well, we fought for its establishment-it is a benefit that is in urgent need of reform, and I think the Government very fairly recognised that Governments of every political party have struggled with this particular issue. So what do you do with that benefit outside, because there’s an earnings limit on it, and there’s a high penalty to pay. If you go 1p over that earnings limit of £100, you lose all of your benefit. What we’re saying is: can you use some of the good elements of the Universal Credit to apply to that earnings limit? Could you introduce some kind of taper? There aren’t that many carers who have earnings with Carer’s Allowance; probably about 40,000 to 45,000, but the statistics are not terribly clear from the Department.

So we do need to look at that and carers themselves really do want to still see reform. I wouldn’t want the door to be shut on the reform of that benefit, because I’m sure you all get lots of letters from carers in your postbag about the level of Carer’s Allowance. We’re obviously very aware of the economic situation, but we do still think that that needs to be looked at, particularly with an ageing population.

Q44 Stephen Lloyd: To reiterate, from your perspective the key thing is that it should be kept out of the Universal Credit, because as soon as it goes into the Universal Credit, you are going to have issues around means-testing. The key thrust of the Carer’s Allowance, for obvious reasons that go around the table, is it is not means-tested. Then you mentioned a couple of areas of possible reform for Carer’s Allowance. If we maintain that it remains out of Universal Credit, are there any others, while you’re actually here, it would be useful to put on the record?

Emily Holzhausen: There are areas around the 21 hours’ study rule, so you can’t get Carer’s Allowance if you are studying for more than 21 hours, and that’s not studying in a classroom or a lecture room; it actually includes marked work as well. So the number of courses that you can take, particularly vocational courses, is very narrow.

Q45 Stephen Lloyd: And how long has that 21-hour rule been on the books? A long time.

Emily Holzhausen: A long time. Again, if we are looking at helping people into work, perhaps we should be looking at exemptions or perhaps changing that definition of what 21 hours of study actually is.

Stephen Lloyd: And would that 21 hours include, for instance, if I was a carer and was doing an OU course?

Emily Holzhausen: Yes, quite potentially. The OU has been very good in trying to get flexible options for carers, but as I say, there are quite a few vocational courses that carers cannot attend, which seems a nonsense. You see lots of parents of disabled children wanting to get back into work but not able to because their skills are outdated and they cannot get that toe back in the labour market to upskill.

Q46 Stephen Lloyd: Thank you for that. Now if I could address this to all of you, please. The Government is considering what extra support may be needed for disabled people in Universal Credit, over and above the additional components and other benefits elsewhere in the system. What are your views on this? Sam?

Sam Royston: Sure. Under the current system there are a few different components that people can receive. The key one that will be affected by change, potentially, is the disability element of Working Tax Credit, because essentially they’re getting rid of Working Tax Credit and replacing it with a series of earnings disregards. Now one of our key points, and we hope that they will be taking this into account, because it’s very unclear in the White Paper, is that the disability element of Working Tax Credit is currently paid per individual with a disability, where most elements of tax credits are paid per household. Under the Universal Credit, again, in most cases it’s clearly specified that the series of disregards will be paid per household. It’s unclear whether the disability disregard, the disregard for disabled people, will be paid per household or per disabled person. So for the sake of households with more than one disabled person in them, we think it’s very important that that is replicated to ensure that people are getting that disregard per disabled person in the household.

Regarding the other disability elements, the disability premiums, we think that those need to be replicated within the Universal Credit system, but don’t think that should necessarily be too much of a problem. I hope not. Similarly, the disability elements of Child Tax Credit should also be replicated within the system. One other concern that we have that relates to the principles of the Universal Credit is that with changes to DLA and ESA going on at the moment, we are concerned that increasing numbers of people may lose entitlement to the disability element of Working Tax Credit as they move into work. One thing that a number of the organisations working in this field have suggested is that, on top of the current work capability assessment, which assesses whether people should be entitled to out-of-work benefits on account of their disability or illness, there should be a disadvantage in moving into work test, which would be less strict, but take account of the fact that many people failing ESA medicals, many people being denied the Disability Living Allowance, still have a lot of disadvantage in moving into work, and a less strict test could help to give them a bit of a boost and help them to move into work, which is the key principle of the Universal Credit.

Stephen Lloyd: Presumably you put that submission into the DWP?

Sam Royston: We only started working on it as a section of groups of that interest the other week, so not yet, but we will.

Stephen Lloyd: Okay, I’m sure you will. Jim, do want to add anything to that?

Jim Vine: On the Housing Benefit, or the housing element side, the June Budget last year extended the entitlement for Housing Benefit claimants with a disability and a nonresident carer, so they are entitled to funding for an extra bedroom. The White Paper is silent on that, but if that was ported across into the housing component of the Universal Credit, that would be welcome.

Emily Holzhausen: I just wanted to add, agreeing with Family Action’s position as well-it’s vital that they continue-that there’s a carer premium as well for the poorest carers to recognise the extra costs of caring. That is mentioned in Universal Credit-that it will continue-but we do really need to make sure that it continues.

Q47 Stephen Lloyd: Presumably, though, that would come under the aegis of wanting, from your position, to stay outside the Universal Credit, or can that slot in?

Emily Holzhausen: It slots in, it goes with the carers who current receive Income Support, so it would go in, it would be part and parcel, but that again is a very important way of recognising some of the additional costs that the poorest carers have. So it needs to be kept.

Could I just add something else? There is also an opportunity to iron out a bit of an anomaly with the disability premiums and Carer’s Allowance. At the moment there’s only one of the premiums, the severe disability premium, where, if you claim it, the carer can’t then claim Carer’s Allowance and vice versa: if the carer claims Carer’s Allowance the disabled person can’t get the disability premium, and it is only one out of three where you have that anomaly. We advise families every day and it causes a lot of tension if you think, "I can’t get my own income because I really don’t want to detract from what my brother might get, even though I do help and support him." So we would like to see that ironed out if at all possible.

Q48 Alex Cunningham: I’d like to go back to the key areas of reform. I have a quite heavy postbag from grandparent carers, and carers of people who have drugs and alcohol dependencies. I just wondered whether this is the opportunity now, as far as reform is concerned, to look again at how we should be supporting these people and at some of the barriers to the support that they actually don’t get.

Emily Holzhausen: We represent people who care for people with disabilities and chronic illnesses. But we work quite closely with Grandparents Plus, who have quite often advocated this, and there are quite a few areas where grandparents who don’t have legal parental responsibility find themselves in very straitened financial circumstances, and those families do need recognition within the system. As an organisation, we would say perhaps you need a different payment than Carer’s Allowance rather than just stretching it out. But there is absolutely a need and an opportunity, as you say, to look at plugging some of those gaps in the system.

Alex Cunningham: And drugs and alcohol dependencies?

Sam Royston: I was going to say, we have been doing some work recently with a group called the Kinship Care Alliance, a group of organisations concerned about kinship carers, including grandparents who take on care for children in often quite desperate circumstances-for instance when family members die-and not under the formal aegis as a foster carer, and the problems that they currently face in the benefit system. One of the points that we raised about the current reforms going ahead is that the welfare benefit cap limiting benefits to around £500 a week to out-of-work households could apply to households in that situation who are taking on additional care responsibilities, and as a result requiring additional benefits for the children whose care they are taking on, which could push them over that cap and mean that they’re not entitled to keep that additional proportion of income. That could have severe consequences for their ability to take on children in those circumstances, and potentially mean that more children are taken into care as a result. So that’s just one related concern that we have on that.

Q49 Glenda Jackson: I have been very interested in what you are saying, but you don’t seem to be asking the questions of how it’s going to be implemented. You are putting up the ideas of those areas where you think people might be excluded, and I share your concerns here. But are you actually arguing for maintaining the present system of assessment, for example, and who is going to carry it out? It is going to be extremely difficult to get this to work, and from the previous evidence we have heard it seems that the Government is actually targeting specific groups; it is not a Universal Credit in as much as it touches everybody who can justifiably claim some form of benefit. But are you actually looking at this? It doesn’t seem to me that you are. It seems to me that you’re looking at the existing systems of assessing people and what may be the barriers to their claiming that benefit. We are trying to find out how it is going to be implemented in the first instance-we still don’t know that-and who is actually going to be responsible for making these decisions in the first place. It is not going to be the people who are making it now. So how would you like to see that assessment being made much simpler than it is at the moment for the bulk of your clients?

Emily Holzhausen: We’d like it to be hugely simpler, and my apologies if we have not made that overarching argument. It is so important to families that we get this right, because the nature of calls to our helpline, for example, has changed quite significantly. We are receiving a lot of calls that are based on anxiety or calls where people are worried about what will happen. One of the difficulties that we have, because there isn’t an enormous amount of detail, is being able to reassure people and say, "This is how it is going to work"; "Yes, you will be affected"; or "We think you will be affected"; "Well, we think it will come in like this." We need clarity very quickly. We have welcomed, certainly, a simpler system. Carers say that one of their frustrations that pushes them to breaking point is frustration with bureaucracy, and any of us around this table-I know your postbags will be full of people who are frustrated at having to fill in form after form after form-

Glenda Jackson: Yes, absolutely.

Emily Holzhausen: -the complexity, repeating information. It can only be to all of our benefit if people don’t have to do that. But of course that goes alongside our concern: the risk of transferring to a whole new system and designing a whole new system, where we need good reliable assessments, as you say, a good reliable computer and IT system, firewalling to make sure that people don’t lose all of their benefits. We do need a lot more layers of detail for people to be able to work and feel confident that it is going to work for some of our most vulnerable families.

Q50 Glenda Jackson: I am speaking off the top of my head here, but what would be useful for me when it comes to the point where one is actually questioning Government on how they are going to implement these proposals, is for you to present to us, for example, when you speak of the bureaucracy, how many forms a family has to fill in to obtain what may be the basis benefit and then the passported benefit. These are the kinds of things we need to know, really, because this system is going to have to change, and it would be how it could be simplified in that way that I would find very valuable to know.

Sam Royston: You are absolutely right; there are a huge number of forms and phone calls that people have to make. Just as an overview for you, as people move into work, progress in work, it will have an impact on their Housing Benefit, Council Tax Benefit, their tax credits. If they are moving into work, they need to move off out-of-work benefits. All of these different things will be affected by these transitions, and we really welcome, to echo what Emily was saying, that it does appear to be, for a lot of people, a simpler system. At the moment, Family Action clients come to us and they find it hugely difficult to make sure that they are claiming all of the benefits they are entitled to, and that they are keeping on top of the administration of them, particularly when they are suffering from mental health problems. We do welcome that it does look like it will be a simpler system. The exact details of that will need laying out.

Q51 Glenda Jackson: But how does it seem to you it’s going to be a simpler system? I can find nothing in what I have read from Government that makes the system simpler. You are still going to have to go through that whole process.

Sam Royston: Well, they are moving together a variety of different benefits, so the Housing Benefit and Council Tax Benefit, the out-of-work benefits such as Income Support and JSA, and your tax credits will all become part of one unified benefit.

Q52 Glenda Jackson: Exactly, but the point is that is three separate areas. You have spoken about local authorities when it comes to Housing Benefit and Council Tax Benefit; you have spoken about HMRC when it comes to tax credit-what was the middle one?

Kate Green: Income Support.

Glenda Jackson: Which is Jobcentre Plus. There are three separate areas there. Suddenly the Government is saying, "We can just roll this into one nice neat ball and away we go." I don’t know how it is going to happen, and I don’t know how it’s going to happen when people have, as you said, changes in their families that may come overnight. The flexibility that is needed, particularly for carers or people with disabilities or mental health problems. How would you like to make it simple? This is what I’m asking.

Sam Royston: As I understand it, they are moving the responsibilities for tax credits, for instance, over to DWP, so they will take over the responsibilities for those benefits, which will potentially make it a simpler system. That is what we mean. Also, it’s simpler in terms of the client’s perspective in working out how much they will be entitled to if they take on extra hours, because there is a single rather than a multiple taper rate that will set various different benefits being withdrawn at the same time. So instead of a withdrawal of your Housing Benefit and Council Tax Benefit and a withdrawal of your tax credits, you’ll just have one single withdrawal rate, which will make it easier potentially, in many circumstances, for people to work out how much better off they will be by taking on, for instance, an extra shift at work. That is one key area in which, for the client at least, it will potentially be simpler.

Q53 Chair: In terms of the disability premium, it will prove too difficult to put in a disability premium and so the temptation for the Government would be just to ignore it and not do it. But if they do decide to do it, what becomes the proxy to decide that you get a disability premium? At the moment it seems like DLA and ESA, but we know that with the reforms of both of those benefits there will be fewer people on DLA, fewer people getting ESA and therefore fewer people getting any kind of disability premium, and it’s a triple whammy. Some people who may have been on incapacity benefit for 20 years will suddenly find that all the benefits they have depended on have gone-not quite in one fell swoop, because it will happen over a two, three, four-year period, but it could be quite a huge impact on a family income.

Sam Royston: I think that there’s a huge problem with ESA, that people are failing their medical assessments, but the medical assessments are also being used when their Disability Living Allowance comes up for review, and as a result they’re having their DLA removed as well. That’s an enormous problem and relates obviously directly to what you’re talking about. The only thing I can think of to say about that is that they need to improve the work capability assessment for ESA, and they shouldn’t, in my opinion, at the moment, be using ESA medicals as evidence in assessing people’s entitlement to Disability Living Allowance, because the work capability assessment at the moment is insufficient to be clear about that.

Q54 Chair: But if we are not using ESA and we are not using DLA because people who are disabled do not qualify for either of those because of the changes, will there be another proxy for the disability premium, or will the disability premium just go, or do you think there’s a completely new measure that should be put in place? I think, Sam, you alluded to a slightly different test for disabled people to get the premiums.

Emily Holzhausen: I do think we have to consider the other changes going alongside this, like DLA, as you quite rightly said, because we would need to construct a new proxy test, otherwise we will see a gradual increase in the number of disabled people who won’t be getting additional funds to help with the costs of disability, and that is a big worry for us. Because it’s running alongside we don’t have an awful lot of detail yet around Disability Living Allowance, the levels that it’s going to be set at, the tests that are going to be required to really know how that will then impact on other parts of the system; for example, there are lots of questions around Carer’s Allowance and its links to DLA.

Q55 Glenda Jackson: Is the central point about that being missed? You’ve raised the issue of the definition; people being excluded from ESA and DLA on the medical assessment. Surely this is the issue. You should be putting in ideas of how that assessment can be far, far more accurate than it is at the moment. We all, as MPs, have letters from constituents where they lodge an appeal and the appeal is upheld, and this is going to become more and more complicated.

Emily Holzhausen: We’re making many representations.

Glenda Jackson: Good.

Q56 Stephen Lloyd: I’ve brought this up with the Secretary of State in the Chamber, and a number of us brought it up with the DWP and Ministers when they came and gave evidence, and what they said is that they recognise that the work capability assessment is flawed, they have set up an independent panel where they’ve got, for instance, the chief executive of Mind-I have particular concerns about fluctuating conditions-and that panel is overseeing it and they are determinedly improving the work capability assessment. Fine. Now, I like what I hear from there. Obviously I will keep an eye on it. Then, Sam, you obviously say it’s still not working, so can you clarify for me that you don’t like the way it worked before and see that the Government take it on board and try to improve it, or do you still think it’s rubbish?

Sam Royston: The Harrington Review is ongoing, so I think that we’ll have to wait and see what reforms they do actually implement to the work capability assessment. It does seem to have considerable problems with it at the moment. I’ve seen cases where people have made multiple suicide attempts and are getting no points for mental health problems. It is just not fair.

Chair: We’re getting a wee bit away from the Universal Credit, but the point is what’s going to be used as a proxy for the disability premiums, and what you’re saying is we don’t know and there could be problems, if they use the old proxies, which are the DLA and ESA, because they’re not as sensitive as previously.

Q57 Alex Cunningham: Looking at child care costs and passported benefits now. Lack of childcare remains a tremendous barrier to work. The White Paper suggests a number of possible approaches to child care support, the child care element, the Universal Credit, vouchers, additional disregards. Which, if any of these options, would provide the most effective incentives for claimants to find work? I think it’s yours, Sam.

Sam Royston: We’ve had conversations with officials again about what these options are and asked them to lay them out in more detail, and they have given some more detail than is in the White Paper about what things they are considering. They set out three key options. One is a child care element, similar to the Working Tax Credit child care element. Another would be a child care disregard from Universal Credit, and the third option that they suggested was a fixed payment of help towards child care costs for anybody who receives child care, and that would be in their view much simpler, which is true, but would be disastrous. To deal with that third one, which I think the Government appears to be moving away from, the reason I think that would be a very poor option is that the families who receive that child care element would have no incentive to take on additional hours because they would get no additional help with child care as a result. So by taking on additional hours, an additional shift, and having to take additional help with child care, they would have to pay the full additional child care costs and lose out substantially.

The child care disregard appears very ungenerous. In a paper that Family Action wrote on this, we suggested that one possible solution would be to disregard child care costs from both the Universal Credit but also from income tax and national Insurance, and that’s more generous but still has problems. In particular, the Government want flexibility, particularly at the moment, when economic circumstances are quite straitened, and there may be limited amounts of help with child care costs, potentially, and a child care disregard has no opportunity for adding to it, essentially; you’ve disregarded it, you can’t go anywhere.

That brings us on to the third option, which in our opinion appears to be the best and certainly seems to be the way that the Government are heading, which is the child care element, similar to the child care element in Working Tax Credit. However, there are problems with that as well. Their proposal seems to be to introduce a child care element akin to help with child care costs through the Working Tax Credit as will be at the point of introduction of Universal Credit. Help with child care costs is being reduced from 80% to 70% of child care costs, and so there will be significantly less help in that way through the Universal Credit, potentially. But there’s also another additional and very important factor. It’s hugely under-recognised at the moment that families don’t just receive help through the benefit system through the child care element of Working Tax Credit. Households on Housing Benefit and Council Tax Benefit also have their child care costs disregarded for those benefits, and as a result can get a substantial additional amount of help with child care costs through those benefits. They can at the moment have up to 97% of their child care costs paid, rather than 18%, because of that additional disregard. We have seen no plans to replicate that within the Universal Credit system, and in fact it would be very difficult to replicate that within the Universal Credit system.

Q58 Alex Cunningham: So you’re saying there are going to be considerable cuts?

Sam Royston: If they introduced it simply at a 70% child care element and no additional help, then it would be a considerable cut. I did a calculation that indicated, for a lone parent with two children, £100 rent and £20 council tax, with earnings of £15,000 a year, working 30 hours a week with no child care, they would be about £15 a week better off under the Universal Credit. For the same family with £200 a week of child care costs, they would be about £35 a week worse off under the Universal Credit. So it is a huge problem.

Q59 Alex Cunningham: So what needs to happen?

Sam Royston: Well, we have proposed a couple of things. We think that for a start they basically need to work out how much money is being spent on help with child care costs through Housing Benefit and Council Tax Benefit, and they need to make sure that that money is fed into the Universal Credit system. So it’s not enough to just replicate that Working Tax Credit element. We think, hopefully, they should be increasing the child care element through the Universal Credit, and we think it needs to be at least 80%. If it’s 70%, an additional problem is that other calculations we have done suggest that for households with high child care costs, taking on an additional shift at the supermarket would face an effective marginal deduction rate not of the 76% that would be standard under the Universal Credit for taxpayers but, taking into account child care costs, could be over 100%. So, at the rate that they are proposing, some families could actually lose money by taking on additional work. That’s just not fair. So, it needs to be at least 80%, preferably higher.

One possibility for keeping costs down that we have talked about, given that they are obviously concerned about cut costs, is an hours-based cap on help with child care costs, particularly because they are reducing help with child care costs down to-or planning to, it appears-families working under 16 hours, which we think is a good thing; it would help a lot of lone parents to move into those so called minijobs. But if there’s just a simple cap on the total amount of child care costs that can be claimed for, as there is at the moment through Working Tax Credit, you could potentially get overuse of child care for people working very few hours with very high child care costs, which would be economically inefficient. We wonder whether there could be some form of hours-based cap introduced to child care costs, so that families working, as they work longer hours, would be entitled to higher payments of child care costs, potentially, and that would be one way of keeping that. But we do think that there should be a child care element of at least 80%.

Q60 Karen Bradley: The child care costs you’ve been talking about, and the child care element of the Working Tax Credit, is only the payment for formal child care, and it’s not helping particularly the low-income households where actually they are relying on family support, particularly grandparents, to help people to be able to go into work, and I just question whether an earnings disregard-I accept the point that it’s very low at the moment in proposals-or perhaps a higher earnings disregard might actually help more families because it would help those households where they are reliant on informal child care.

Sam Royston: In a way I think we don’t necessarily want to in all circumstances encourage informal child care. There are a lot of advantages for people taking on formal child care-the development issues for their children-but for households with informal child care, for instance, if they’ve got no child care costs, as I said, there are actually already advantages through the Universal Credit system. So if they actually don’t have child care costs because they’re just using informal child care, the system does appear to actually be, to an extent-for many families, at least-more generous than the current system. With the system of income disregards, as I gave in the lone parent case with no child care, they could be using informal child care; essentially, free child care through the lone parent’s mother, for instance. Many of those families do appear to be a bit better off than under the current system, so it is a real problem about where people are paying for child care.

Q61 Karen Bradley: Do they tend to be, in your experience, the very low-income households, or do they tend to be the more middle income?

Sam Royston: I don’t know; I wouldn’t want really want to comment on that. I think it depends really on family ties; that is the really big thing. If people have coherent social networks of friends and family who can take on child care of their children, then they use them. That, I think, is the real distinction between people who are socially isolated and aren’t able to feed into those networks of informal child care, and that could potentially be low or higher-income households.

Q62 Teresa Pearce: One of the major outgoings of anybody is their housing costs, and presently if you’re on benefits and you move into work you still get Housing Benefit depending on your level of pay, but if you are a homeowner you lose any of the benefit that you get towards your housing cost if you move into work, and it’s proposed that the Universal Credit might take this into account. Jim, I think it was in your report that you said, or the report said, that "adopting this would be a bold new form of support with housing costs". What would you envisage?

Jim Vine: Across the piece I think it’s important to get the support with housing costs right. As you say, it’s a huge amount of people’s expenditure. There’s the inflexibility of moving, particularly in owner occupation, the social and economic effects that are incurred if unnecessary moves happen. So, if you want to talk first about owner occupation, the current form of support with mortgage interest is not very compatible with the Universal Credit. It’s hours based, rather than smoothly tapered, there are time limits at the beginning and end for how long it can be claimed, and it’s at a standard interest rate rather than reflecting the actual expenditure of the household, so it doesn’t match into that model particularly well. I don’t think any of those points themselves are inherently insoluble, but they might be expensive to do to bring it directly within universal credit.

What we talked about in our paper was a model called SHOP, which was first developed by some academics working for the Joseph Rowntree Foundation. SHOP is the Sustainable Home Ownership Partnership. Basically speaking that is a form of mortgage protection insurance, and where the partnership part comes in is that it is 50% funded by the borrower, and 25% each by the state and by the lenders. This resolves some of the issues. It’s quite a substantial change from the current situation, but it probably provides a more affordable means of providing a better safety net for homeowners than is currently provided by support with mortgage interest, although it doesn’t necessarily address all of the issues, and I think probably what we’d urge is that Government should fully cost out the two options of either making a form of SMI that’s properly compatible with Universal Credit, or moving over to the SHOP model and properly assessing all of the benefits, because we do not have the data to do that modelling that hopefully Government would have access to.

Q63 Teresa Pearce: How hopeful are you that people who are homeowners will be looked at fairly in this?

Jim Vine: We’d certainly welcome the statements that are contained within the White Paper that say they are going to bring home ownership within the Universal Credit, if it was done in a method that provided a decent level of support. Because as well as providing that support to the individual homeowners, I think there’s a good case from the perspective of the state; having a decent safety net for homeowners has very beneficial effects in terms of moderating house price crashes. If you’ve no safety net, you’d end up with a lot more repossessions in recession and things like that, which causes larger fluctuations in house prices, which has negative economic effects. So there are benefits to both sides. I’m relatively neutral about the exact model that you use to provide that safety net.

Q64 Teresa Pearce: Moving on generally about the issue of housing and the Universal Credit, as we’ve heard there’s still a lot of detail in all parts of Universal Credit, but I think we need more detail on housing in particular. One of the things that concerns me is that, if you go to a centralised credit, at the moment Housing Benefit is paid through local authorities, so there is a lot of local knowledge and expertise, and we will lose that knowledge and expertise. Do you think that would be a problem?

Jim Vine: On the rental side, where the Housing Benefit comes in and particularly the private rented sector-I believe it’s a phrase in the White Paper-certainly the desire would be to cover reasonable housing costs for people. But that isn’t necessarily the same thing as providing them with unlimited support, or even necessarily their exact support, be it the exact cost that they’re paying. So, in response I suppose to the question earlier about where we can bring some additional simplicity to this system-simultaneously working around some of that loss of local knowledge-it would be to look at a system whereby you have a series of flat rates based on household composition in each local area. This is a system that they have in the Netherlands. What that provides, in terms of simplicity for the claimants, is that you know your household composition, so you can go to a table and look up your local area. There might be five or 10 different household sizes or shapes that are allowed, but it’s very simple then to look up, rather than current Housing Benefit calculations, which is one of these forms that runs to pages and pages of information that you have to feed in. So it’s perhaps a way of working around some of those issues of knowing all of the details in a local area.

Broadening that out about how you might then set some of these rent levels, there is a desire within the Universal Credit to broadly make a third of the market accessible to claimants, which doesn’t seem unreasonable, but I think there’s probably a bit more nuance required, which adds some complexity on the side when you come to set up these tables, but that is not experienced by the claimants themselves. So in areas with particularly large numbers of claimants, you might need to set your levels a bit differently, and where there are particular problems at the low end of the private rented sector, again you might want to address that in setting those levels.

Taking that forward, the other issue in setting these is how you uprate them over a period of time. As you know, the Housing Benefit, as it currently stands, is being moved to a system of uprating by CPI, which I think Lord Freud, when he appeared before you, said is a measure that is running to the end of the spending review period and should not be taken as a long-term indication and extrapolated out too far. I think if you take that as a commitment that you can uprate according to an index for a short period but then you need to revalue according to real rent, it’s not too much of a problem. It gives simplicity to the state in setting those levels; it doesn’t have to acquire rent data quite so often. But you need to really have that commitment in from the beginning that you’re going to revalue it according to actual rents in a given area once a year or perhaps once every two years. If you stretch it much beyond two years it’s starting to get a bit tricky and drifting too far away.

Q65 Chair: Is there a case, if you want simplicity and you want it to fit in with Universal Credit, that the DWP itself should take over the administration of Housing Benefit and take it completely out of the hands of local authorities?

Jim Vine: I think that, yes, some of that would be possible. I think where you might have difficulties is if you port over a system from the current Housing Benefit system where you need to check rent levels, see people’s rent books or contracts, things like that. That is going to be much harder to administer through a central system. But if you did go to a system of more flat rates being paid to people, then potentially that is quite possible. There’d be some edge cases, I think, where you’d want to carefully consider how you handle the data for non-traditional housing types: Gypsy and Traveller caravan sites, perhaps hostel accommodation, and in those cases it would make sense to think about whether you want some sort of knowledge system within DWP to track those. They would require special treatment, but that could potentially move to the centre as well.

Q66 Glenda Jackson: Can I just ask you a question on mortgage rates before I move on to that? There are implications within Universal Credit, for example, where people are excluded from certain benefits if they have savings of £16,000, and if one looks at other aspects in the benefit system, where the ownership of a house is deemed to be money in the bank, and when looking at social care and things like that, there are implications, are there not, in what is being proposed there? The other imponderable is interest rates. At the moment, interest rates are very low, but we’re being told that they are going to go up over time, so the variations for mortgages in that sense are on a par, it seems to me, with some of the changes that the Government is proposing as far as Housing Benefit is concerned. The vagaries of the market; I think that’s what I mean.

Jim Vine: Support with mortgage interest-I think it was ISMI at the time-I think dates back over 10 years. They used to pay that support based on actual mortgage rates; the rate that an individual claimant was paying. I think it’s 10 or even 15 years ago that they moved that over to paying a flat rate. The issue was it was very difficult to keep track of people’s mortgage rates if they were on a variable rate and they had to renotify. I think some of the ways around that would be to say to the lenders, "This support is being provided by the state, so it’s pretty cast iron, so this is the rate that we are going to pay," and you accept that. At the moment they pay a flat rate, but if the borrower’s rate is higher than that, the borrower’s losing out. Conversely, if the borrower’s rate is below that, you are actually paying off some of their capital, as well as making the interest payments. So yes, the market is important.

Q67 Glenda Jackson: Thank you. This is actually for Family Action first, and BSHF. They’ve specifically left council tax out of Universal Credit, and you’ve both stated there’s a risk that local authorities could set up schemes in ways that risk undermining Universal Credit. Could you expand on that for us?

Sam Royston: The Government seems, at least to us, on the face of it to have two apparently contradictory aims. One is simplifying the system and giving clear work incentives, and the other is localising the system, in particular in terms of Council Tax Benefit. The key aim of the Universal Credit, as I alluded to earlier, is that you have a single withdrawal rate that helps make it much easier for clients to understand clearly how much they’re going to lose if they take on additional hours. If you remove Council Tax Benefit from the Universal Credit system, there will need to be some way of means testing it, assuming they’re not giving full Council Tax Benefit to everybody. If you means-test it separately, outside of the Universal Credit, you’re going to introduce a second withdrawal rate, potentially, which will lead to both additional complexity in understanding how the Universal Credit and the Council Tax Benefit are being withdrawn together, but also could reduce work incentives, because you’d not only have your Universal Credit withdrawn, but you’d also be having your Council Tax Benefit withdrawn separately. So it undermines those key intentions of the Universal Credit system, potentially, and we argue that it’s very important that Council Tax Benefit should be included in the Universal Credit, along with Housing Benefit and other benefits, to ensure that it does avoid that second tapering to the second withdrawal rate.

Q68 Glenda Jackson: So you are actually arguing, as you did on another issue, for proxy, as far as council tax is concerned?

Sam Royston: I’m arguing that Council Tax Benefit should remain as it is: a means tested benefit but integrated along with Housing Benefit into the Universal Credit system, so it’s withdrawn as your income increases, but as part of the Universal Credit.

Q69 Glenda Jackson: And how is that going to equate with the variability of both of those? Nationally, I’m speaking.

Sam Royston: They seem fairly happy to have variable housing costs integrated into the Universal Credit, so it doesn’t seem a huge problem.

Glenda Jackson: Well, if they’re low they do, they’re not happy if they’re high.

Sam Royston: If they’re high, you’d still receive that additional element within your Universal Credit; it just affects the amount of disregard you get, because they don’t want your disregard to reduce below a certain level. So it seems that they’re happy doing that with housing, with rents. I don’t see why they shouldn’t be able to take into account variability in the Council Tax Benefit.

Q70 Glenda Jackson: Would you essentially still leave it with local authorities?

Sam Royston: I’m not sure that that’s the key problem. I think the key issue is about delivery of the Universal Credit as an integrated benefit.

Q71 Glenda Jackson: So you’d just automatically include that in your assessment of claimants?

Sam Royston: Exactly.

Jim Vine: I think the description of the problem is entirely accurate: about how you can have these different withdrawal rates stacking up one atop the other and undermining the key objectives. I suppose I saw two alternatives, as Sam said: you can take it within the Universal Credit and then just apply the same taper, and that would be fine; the alternative is that you localise it, but you give local authorities a very strict framework within which they have to work, and in some way the specification that you give to local authorities is such that it doesn’t create that additional tapering. Maybe they can’t withdraw it until they get past the taper, or you put limits on it or whatever it might be. I think that’s theoretically possible, but I don’t see much advantage to doing that over and above just taking it within the Universal Credit, which would be simpler.

Chair: As you heard, the bell has gone and so our time is up. We did have a couple of questions on conditionality and sanctions and things. I think from your evidence there are still a lot of questions that still need answers, and I think Glenda’s frustration was the fact that nobody seems have some of the answers for those questions. I think she’s looking to you to come up with some of them, but it’s obviously for the Government as well to address some of these very thorny issues, and we look forward to that. But thank you very much for coming along today. It was very useful and very interesting, and thank you very much for your help this morning.