White Paper on Universal Credit

Written Evidence Submitted by Mckay2010

Summary

The Universal Credit is an ambitious attempt to radically change the benefits and tax credits systems. This note identifies some of the key challenges that it faces. There remain important unanswered questions about the treatment of carers and of council tax benefit within Universal Credit. A more responsive system also brings certain disadvantages as well as improvements, in terms of effects on people’s budgeting.

Background

1. We have been here before. There have been several past attempts to pursue greater integration of benefits and the tax system (tax credits in this instance). They have tended to founder, and for similar reasons.

2. In 1972 a Green Paper, Proposals for a tax credit system, sought to combine the tax system with various social security benefits. It stopped short of full integration. Despite some support it was not taken forward; among several issues there was also a concern that the proposed 50% withdrawal rate was too high and would have negatively affected work incentives.

3. In 1984 researchers at the Institute for Fiscal Studies (IFS) Dilnot, Kay and Morris proposed the most thorough-going integration of taxes and benefits, including an end to contributory benefits and means-testing of all social security. Whilst this was not taken forward, the June 1985 Green Paper on the Reform of Social Security talked about some closer integration of taxes and benefits. Instead the 1988 Fowler reforms offered greater consistency in the treatment of working and non-working families. It aimed to pay Family Credit (an in-work benefit, the predecessor of tax credits) through the wage packet, but this was not implemented – probably by the strong combination of ‘purse-v-wallet’ arguments (non-working mothers would potentially lose out to fathers who were in work) and opposition from the small business lobby on administrative grounds.

4. The 1997 Labour manifesto said "We will examine the interaction of the tax and benefits system so that they can be streamlined and modernised, so as to fulfil our objectives of promoting work incentives, reducing poverty and welfare dependence and strengthening community and family life." Martin Taylor (of Barclays Bank) was appointed to a task force to look at the closer integration of taxes and benefits, and policy moved towards tax credits firstly through Working Families’ Tax Credit, and now the Child and Working Tax Credits.

5. In 2009 the Centre for Social Justice’s report, Dynamic Benefits, proposed a ‘Universal Credits’ scheme. This would, "Simplify the benefits system by moving from the current 51 possible benefits, to two streamlined payments – Universal Work Credit, and Universal Life Credit". It proposed a 55% taper on net income (55p in benefits lost for each extra £1 in take-home pay).

6. The proposed Universal Credit is less ambitious, seeking to replace six of the current benefits and tax credits with a single programme, and with a 65% taper on net earnings. The benefits/credits replaced are: Income Support, income-based Jobseeker's Allowance, income-related Employment and Support Allowance, Housing Benefit, Child Tax Credit and Working Tax Credit. As with the CSJ’s Universal Credits, the scheme also proposes a massive extension of earnings disregards in benefits – the amount that may be earned before benefits are reduced – except in the case of Universal Credit for single adults who lose their current low disregard entirely.

Key Challenges

7. Schemes of this type must meet a number of difficult challenges. It is largely because of such challenges that we have different kinds of benefits, and distinctions between transfer payments made to working compared with non-working families. The key challenges include:

a. Who, in couples, receives the payment? If the aim is to reward work, then the worker might be best-placed to receive the payment. If the well-being of the family and children is important, it has been traditionally assumed that mothers should be paid directly, as with Child Benefit. This is the ‘purse versus wallet’ dilemma.

b. Second, what are to be the periods of assessment and payment? Income-related benefits have generally responded to short term changes in income, on a weekly or monthly basis, whilst tax credits have been assessed over a much longer period and (with exceptions) are slow to respond to changes in earnings. Tax credits in a given year may relate to the level of income in the previous year – and a new disregard for income drops (from 2012) will reinforce this ‘stickiness’ of tax credits.

c. What is the role and fate of benefits that are outside the system? This includes the remaining contribution-based and disability-related benefits and, importantly, benefits for carers and mothers.

8. Whatever the administrative design of benefits and tax credits, there are inevitably trade-offs between maintaining work incentives, keeping people out of poverty and keeping down the overall cost of any system.

The Universal Credit

9. Universal Credit has particular answers to some of these challenges. There are also a number of points still to address where final decisions appear still to be made. Gareth Morgan, in his analysis Benefits in the Future, comments that the White Paper is ‘less definitive than is usual’.

10. One benefit not included in the definite plans is Carers Allowance. This is set at a lower level than Jobseeker’s Allowance, and including it within a single Universal Credit would presumably require higher resources – or a more transparent admission of the lower benefit rate for this group. The Social Fund is proposed for partial inclusion in the new system (for the more automatic elements) and partial ‘devolution’ to local authorities for more discretionary elements. Details of the movement of the latter systems (Crisis Loans and Community Care Grants) are yet to be revealed. Council Tax Benefit is being devolved to local authorities, and reduced by 10% compared to current spending, and is therefore also outside of the Universal Credit. However the treatment of Council Tax is important to the calculation of marginal tax rates, and to the certainty of any scheme wanting to ensure that being in work is financially more rewarding that being out of work.

11. Another issue not directly resolved by the White Paper is the treatment of ‘passported benefits’ linked to existing schemes (such as free school meals, or free prescriptions). These have previously been linked to conditions based on combinations of hours worked and amounts of benefit received. The plan is to withdraw such benefits gradually rather than at a single income threshold, but the details are still to be worked out.

12. The responsiveness of the Universal Credit to changes in circumstances relies on delivery of ‘real time’ PAYE information from HMRC. This excludes the self-employed by definition, and it presumably faces challenges where there are two earners in a couple, or where a person holds more than one job.

Other considerations

13. Older people are excluded from the main Universal Credit – although the White Paper allows that they might benefit from inclusion if they are still in paid work of 16+ hours (and thereby ineligible for Pension Credit). This also prompts questions about the treatment of older people living with a partner of working age, in terms of which benefits system they would be included within (albeit this is nothing new).

14. A gradual introduction of Universal Credit is proposed, starting with new claims and then bringing in existing claimants. There is transitional protection for those who would be worse off at the point of introduction. Experience suggests that there are problems running different systems in parallel (e.g. the child support systems) and this may give rise to a ‘better-off’ problem, where some existing claimants would be better off on Universal Credit. There will need to be guidance on the circumstances in which a new claim would be permitted. The transitional protection may also need to consider the effect of small changes in circumstances (e.g. a few hours of extra work) and their effects on the protection offered.

15. The changes to the system of income disregards is quite radical. If they are an important source of the advantages of the Universal Credit over the existing system in showing that work pays, why should their introduction be delayed? This would seem one of the easier elements to introduce in the near future, rather than waiting until 2017 for everyone to benefit from this change.

16. Changes that replace several payments with a single payment are likely to affect the way that people budget. Whilst those on a salary may be familiar with a single payment, those receiving several benefits may be accustomed to allocating certain benefit to different uses – see for instance Elaine Kempson’s analysis of Life on a Low income (1996). They may have to learn new budgeting habits under a Universal Credit. The plans for digital applications might also need to reflect the use of potentially costly digital devices by some low-income families.

17. Removing the stickiness of some benefits, particularly tax credits, is potentially double-edged. A person gaining a higher wage, or working more overtime, might see a reduction in their Universal Credit payment in the next month rather than in several months’ time under the current system. This might mitigate the perceived returns to working additional hours. The effect of transparency is made all the more important as, overall, marginal deduction rates continue to be relatively high for many people.

18. There are, of course, important advantages to introducing the Universal Credit. This note has focused on areas of challenge and potential difficulty.

December 2010