White Paper on Universal Credit

1.1 Written Evidence Submitted by the Trade Union Congress

3.1 Summary

- The TUC is strongly in favour of benefit simplification and recognise that the Universal Credit, by reducing the complexity of the benefit and Tax Credit systems may help people move into work.

- The TUC welcomes the extension of help with housing costs to home owners in low paid jobs, but is concerned that the cut in support for Council Tax bills may lead to unfair pressures on vulnerable families.

- The TUC welcomes the proposed extension of free school meals to low paid families, but we are worried that including health benefits and free prescriptions in the Universal Credit could have adverse consequences for middle income disabled people.

- If the Universal Credit does not cover in-work costs, the reputation of the whole scheme could be threatened. Childcare is the most important of these costs and the TUC especially regrets the decision to cut the proportion of childcare costs covered by the tax credits.

- The TUC welcomes the decision to extend coverage to people in low paid jobs of under 16 hours a week, but we are concerned that the decision to raise the taper rate to 65 per cent will exclude many struggling middle income families from coverage.

- Benefit reform is not, by itself a sufficient anti-poverty strategy, it is also important to address in-work poverty and insecure and vulnerable employment.

Historical background

1 The Conservative administration of the 1980s resolved the debate about how to address work disincentives and poverty incomes through the 1986 Social Security Act. The Act eliminated most unemployment traps - since then, the number of people who are worse off if they move into employment has been comparatively small and further progress has been made with the introduction of the minimum wage and tax credits.

2 The reforms that achieved this have intensified the means-tested character of the British system. The 1986 Act and the legislation that followed reduced the coverage of National Insurance to the point where, apart from Retirement Pension, it is now vestigial. The ingenuity of officials and the political capital of ministers have been spent on successive welfare-to-work reforms in which reliance on means-testing has been taken for granted.

3 Seen from this perspective, the most important characteristic of the tax credits is that they have expanded the coverage of income-related provision. The last government was working towards a Single Working Age Benefit, which would eventually be integrated with the tax credit system; this would have represented a continuation of previous reforms, rather than a completely new development.

Universal Credit – picking up the baton

4 The Universal Credit picks up this well-established approach – relying on income-related provision whilst trying to address the problems created by means-testing. One of these problems is highlighted in the White Paper: the complexity of the system. In 1984, the CPAG National Welfare Benefits Handbook was 211 pages long and the Rights Guide to Non-Means-Tested Benefits was 156 pages; today, the Welfare Benefits & Tax Credits Handbook weighs in at 1,604 pages. Most of the extra length is the result of the system having become more complicated, more difficult to describe and less certain in its operation.

5 This complexity is inextricable from the increased reliance on means-testing. Universal benefits are simple to legislate for, administer and explain, National Insurance benefits use complicated contribution rules but once these have been established for NI as a whole, the extra complexity for any individual benefit is limited.

6 Many claimants do not know why they receive the level of benefits they do, their income can change from month to month without their understanding why and they can find themselves unexpectedly in breach of the rules. At the same time, the general culture of contempt for claimants can make their benefits seem a very insecure achievement and moving into a job can seem very risky – especially for people whose main job opportunities may not be particularly secure. People in these circumstances are right to think that they may well need to claim benefits again in a few weeks’ time and that there are no guarantees they will qualify for the same income they have at present.

7 This is an important reason for hope that the Universal Credit will make a difference. It also suggests that repeated suggestions that large numbers of claimants are in fact trying to avoid work are counter-productive. A simpler system, in which the rights as well as the responsibilities of claimants are emphasised, would in our view give more people confidence about entering employment.

Marginal rates

8 A further barrier that has emerged as an important issue in recent decades has been the effect of high marginal effective tax rates. The 1986 Act may have drastically reduced the number in the "unemployment trap", but at the expense of increasing the number in the "poverty plateau." The combination of income tax, National Insurance Contributions and the pound for pound deduction rates in means-tested benefits (with very low disregards) means that people who increase their earned income may be little better off. It was for this reason that Family Credit and then the tax credits were created – the fact that the payment is ‘tapered’ means that people see some benefit and there is more incentive to increase hours or move into a job with a higher hourly rate.

9 The tax credits have reduced the numbers facing extremely high marginal rates – in excess of 80 per cent – but at the expense of a larger number facing rates of over 60 per cent. This is higher than the marginal rate of income tax and National Insurance Contributions faced by people at all but the highest rates of pay. And, as the White Paper shows, for those relying on Housing Benefit and Council Tax Benefit, marginal rates in excess of 90 per cent are still possible. There is a significant (though not enormous) group of people in this position (the White Paper suggests 200,000 [p.54]).

Housing costs

10 The proposal that the Universal Credit will cover mortgage interest payments as well as rent is very welcome. There may be fewer people in the unemployment trap, but one of the reasons why it still exists is that there is no in-work support for home owners akin to the way Housing Benefit can continue helping with rent after claimants have obtained paid employment. Some owners find that the jobs they might have a chance of getting will not pay enough for them to keep their homes – and the more expensive their house was, the harder this problem is. The TUC supports equal treatment of people who pay rent and those who pay a mortgage and this is a very positive proposal.

11 Tax credits have helped reduce the size of this problem, but the fact that Housing Benefit and Council Tax Benefit are not integrated into the system has meant that it has not been eliminated. In principle, therefore, the White Paper’s proposal that the Universal Credit should cover housing costs and Council Tax is correct. Unfortunately, the White Paper is rather vague on this issue, limiting its description of the UC to "an appropriate amount will be added to the Universal Credit award to help meet the cost of rent and mortgage interest. For those who rent their accommodation, this amount will be similar to the support currently p rovided through Housing Benefit " (p. 19 . )

12 The section on Council Tax Benefit is even vaguer, admitting "there is more work to be done on the practicalities of the new approach ." It is hard to see how Universal Credit, which will be a national scheme, will be made to accommodate a Council Tax rebate that varies in structure and level from one local authority to another. This must be done, however, or the Universal Credit promise that people will always be better off in work cannot be guaranteed.

13 Although the Universal Credit is a separate matter from the 10 per cent reduction in Council Tax Benefit spending, this is an appropriate placed to point out that this will cause significant difficulties. Councils will not be in a position to make up this difference from their own incomes; they will have to respond by cutting the level of provision. Some local authorities will protect the very poorest claimants, but at the expense of excluding those with somewhat higher incomes; such an approach would penalise those on low to middle incomes, including many of those the government wants to encourage into employment. Others may require all claimants to pay a proportion of their Council Tax; this would re-create one of the disasters of the poll tax, when local authorities had to pursue very poor residents through the courts for small sums of unpaid Community Charge. This was expensive, time consuming, made council finances more erratic and exacerbated the poverty of the most vulnerable.

Passported benefits

14 In principle, the TUC supports the White Paper’s proposals on free school meals (p. 48); our comments on this issue also apply to several other passported benefits, such as free or subsidised school uniform schemes provided by some Councils. It is unfair that a low income working family may not qualify for free school meals while an out of work family with much the same income does. We will need to see, however, what is meant by the White Paper’s statement that the government will "consider the appropriate level" for an income or earnings threshold. If we follow the letter of paragraph 15 on page 48 – the same number of claimants but a graduated threshold – this would seem to indicate that some people who now get free school meals would, under UC, be paid only for a proportion. We would oppose this – most of the people who currently qualify for free school meals have very low incomes and cannot afford a lower level of provision. But this is not entirely clear from the White Paper and it may that our reading is over-pessimistic.

15 The ending of passporting for health benefits and free prescriptions would be a very different matter. Disabled people with quite high wages could easily find their incomes substantially reduced if eligibility were determined only by a means-test. Disabled people would find that their disposable income was much lower than that of their non-disabled colleagues doing the same job. If the government proceeds with this part of the proposals on passporting, it is vitally important that another route to free prescriptions and health benefits is provided for disabled people and people with long-term health conditions.

In-work costs

16 In-work costs constitute a final barrier to employment. Together with the absence of support for mortgage interest for people in low paid work, they largely explain the continued existence of the unemployment trap. Some workers face one-off costs, such as having to provide their own tools or equipment and this can be a problem for those who are destitute; the TUC supports a system of one-off grants or the reintroduction of the JCP Adviser Discretionary Fund to deal with this problem.

17 A more common problem is that regular costs – such as travel to work – can wipe out the extra income from going to work. The last government wanted to make sure that people would always have a higher income in employment, but the "better off in work guarantee" never succeeded because of this issue. This indicates the difficulty of making such a promise: if the Universal Credit does not cover in-work costs, the reputation of the whole scheme could be threatened. If claimants make the transition to employment and then find that their net income goes down, not up, the news will soon spread and it will be much more difficult to overcome cynicism about DWP promises.

18 Childcare is the most important source of in-work costs. Childcare can easily account for most of the earnings of the second earner in a couple family and addressing childcare costs has been a major reason for the success of tax credits in substantially raising the participation rates of lone parents.

19 The 2006 Budget increased the proportion of childcare costs met by Tax Credits from 70% to 80%. The October Spending Review reversed that move - families with weekly childcare costs of £300 (the maximum payable for a low-income family with 2 children) will be £30 a week worse off. The Spending Review equalities impact assessment recognised that "the reduction in support through the childcare element of tax credits…will particularly affect women in lone parent households."

20 The TUC would urge the government to reconsider this decision when introducing the Universal Credit.

The taper

21 Under the current system, in-work support is not available for those with jobs of under 16 hours a week. In the out-of-work system, disregards allow non-disabled people no more than three or four hours a week of very low paid work. This is a system that discourages people from taking up casual work (or encourages non-disclosure) and is particularly unhelpful for people who can work varying amounts because of caring obligations or fluctuating health conditions. Some people, for instance, may be able to work five hours this week, thirty hours next week but not at all for the following fortnight. Under the current system, they would have to declare this week’s work (and possibly see most of what they earn deducted from their benefit), end their claim next week and then re-claim the week after (with the likelihood of a long wait before their benefit was restored.) The TUC has long advocated various reforms of the disregards to address this problem and the Universal Credit will be very welcome if it provides work incentives for people who are only able to undertake short hours jobs or whose working time fluctuates.

22 The TUC supports the objective of making sure that all out-of-work claimants who move into paid work see their net incomes rise as a result. We believe that significant progress on this front has been made over the past 30 years and that the Universal Credit could be a further improvement.

23 Unfortunately, the price of this enhancement is the exclusion of many low-to-middle-income workers who are currently entitled to tax credits. The taper rate for tax credits is 39 per cent, and will rise to 41 per cent; the taper for the Universal Credit will be 65 per cent. When combined with income tax and National Insurance Contributions, the marginal effective tax rate will be 76 per cent. The White Paper includes the following chart:

24 The White Paper says that this chart shows that "many households will receive more under Universal Credit than under the current system." The chart shows small weekly gains for those in lower income deciles, and insignificant losses for those higher up the income distribution. But other points should also be taken into account:

- The chart compares household income in 2014/15 after the introduction of Universal Credit with what household income will be in 2014/15 after the welfare cuts outlined in the Chancellor’s June Budget. It does not compare the position after the introduction of UC with the position now. The Housing Benefit and tax credit cuts mean that such a comparison would look very different.

- The chart does not include childcare costs. These are significant, paying as much as £10,000 to low-income working families with more than one child.

- Most importantly, the chart covers all households, not just those who are claiming benefits or Tax Credits. While most people in the bottom deciles will be receiving benefits or Tax Credits, most people in higher deciles will not.

25 If the graph was based on an analysis comparing the current system with Universal Credit, if it only considered households in receipt of benefits and Tax Credits and if childcare costs were included, it would show a very different picture: gains would be far less – and many would be shown to lose significantly.

Benefit reform is only part of the solution

26 However, we believe that if the Government is serious about improving the incomes of those working at the bottom of the labour market it will need to recognise that benefit reform can only ever be part of the solution.

27 "Making work pay" is a worthwhile objective, and one that the current government shares with its predecessor. But in the current circumstances, poor financial incentives are not the main problem preventing people from moving into employment. The lack of jobs is far more significant: across the economy, there are currently only 459,000 jobs available, with the most recent data showing a quarterly fall in the vacancy level. Vacancies remain around 170,000 below their pre-recession peak and the ratio of unemployed people to jobs is over 5:1. Vacancies are in particularly short supply for those whose job searches are restricted, such as lone parents who need to find jobs that fit around childcare responsibilities and for those, such as disabled people, who face continuing discrimination. Unemployment is a result of poor demand for labour, not failures of the welfare system.

28 The TUC believes that welfare reform has its place, but it needs to fit in to a wider strategy that addresses in-work poverty and the insecurity of many jobs. Work can only be "the best route out of poverty" if these issues are addressed as well as worklessness. A broad strategy would aim at reducing the proliferation of insecure exploitative jobs with atypical employment status, where people who are classified as 'workers' or falsely 'self-employed' can earn below the minimum wage and experience significantly less employment protection than those with 'employee' status. Such a strategy would also need to recognise the vital role that the National Minimum Wage continues to play in reducing in-work poverty, and the important contribution that Living Wages can make to raising the incomes of those who are the worst off.

December 2010