Think tank warns Universal Credit risks turning into a vehicle for cutting the benefits bill

Recent changes to Universal Credit driven by cost-cutting moves from the Treasury have taken it too far from its original purpose and risk turning it into “a very complicated vehicle for cutting the benefits bill”, a think tank warns in a report out today.

The Resolution Foundation says that UC now has serious design flaws that must be resolved before the rollout is complete and argues that it needs to focus more on support for single parents and second earners.

Roll-out begins this month, with claimants in Bath and Newcastle among the first to receive it. According to current government timetables, UC is expected to be fully rolled-out by the end of 2021, by which time almost half of all families with children will be entitled to it.

The Foundation’s report considers how the reform – viewed alongside plans to boost take home pay via the National Living Wage and increases in the Personal Tax Allowance – compares with the current system of tax credits and other benefits when it comes to the returns to entering and progressing in work.

It finds that in absolute terms the new system reduces the returns to work for many families. Around 2.5 million working households will be worse off by an average of £41 a week, while around 2 million households will be better off by an average of £34 a week. The new system particularly reduces work incentives for those who are most sensitive to such inducements including single parents and second earners in couples.

Recent reductions to work allowances – the amount claimants can earn before their benefits start to be withdrawn – have deepened the problem.

The report says the very worse disincentives to enter work in the current system will be addressed. The analysis shows that under tax credits half of first earners in couples with children entering work at low-paid part-time hours would keep just 10 per cent of their post-tax earnings. Under UC, these disincentives have virtually been eliminated.

However, the Foundation says that with worklessness in the UK already at a record low, encouraging first earners into part-time work is not the big labour market challenge the country faces today. Instead it says that with around two in every three poor children now living in working families, UC should focus on boosting incomes by encouraging entry into work among second earners and by supporting pay progression for all recipients.

The analysis shows, however, that the returns to entering work for second earners are far worse in UC than under the current tax credit system. Under UC, the majority of second earners will keep less than half of their earnings if they enter work at part-time hours, creating a risk that they choose not to work at all.

The report says that in order to make the most of UC, the new Secretary of State should reclaim the policy from the Treasury and follow a three-point plan:

– Focus on those most likely to respond to financial incentives to work, including single parents and second earners
– Offer more practical support to boost in-work progression
– Address practical concerns about UC’s interaction with people’s lives by reducing complexity, for instance, allowing Housing Benefit to be paid directly to landlords and streamlining reporting requirements for the self-employed and parents with childcare costs.

David Finch, Senior Economic Analyst at the Resolution Foundation, said: “As Universal Credit begins the roll-out of its full service this month, now is the right time for the new Work and Pensions Secretary to take stock of progress to date. It is a reform with lots of potential, but it has veered off-track over recent years, particularly following a series of sharp cuts in support to working families.

“With UC’s main goal of making work pay now under serious threat, the Secretary of State should reclaim the project from the Treasury. Three steps are key.

“He should prioritise support on those most likely to respond such as single parents and second earners, ensure UC does more to help those already in work to progress, and iron out some of the practical concerns that have arisen during the initial pilots.”

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