Universal credit ‘could result in many losers’

The coalition government’s plans to introduce a ‘universal credit’ to replace the current range of welfare benefits and tax credits could result in many people losing money, according to a leading economist.

The coalition government’s plans to introduce a ‘universal credit’ to replace the current range of welfare benefits and tax credits could result in many people losing money, according to a leading economist.

Professor Paul Gregg from the University of Bristol says the simpler the new system is, the more it will result in large numbers of losers even with substantial extra costs to the Treasury. The more complex it is, the less radical a reform it represents and the less attractive it becomes. 
 
Selling a system with substantial extra costs and many losers will prove very difficult, Professor Gregg argues in the latest issue of Research in Public Policy. He adds that doing it in one big bang may repeat the administrative nightmare that occurred with the more modest integration of three different sources of support for children with the tax credit system. 
 
He says that the assertions used to justify the reform – that welfare spending is out of control and the system broken – "do not stack up". 
 
He states that the real picture that emerges for the welfare system is one of long-term declines in numbers of claims and total spending as a share of GDP. The welfare system has been steadily improving since 1996, but with the current recession – the worst since the Second World War – masking the improvement, he argue, adding that welfare spending is not out of control but doing its job in a recession where there is increased need for support. 
 
The central idea of the universal credit, trumpeted as part of the government’s plan to "make work pay",  is to have a single deduction rate as incomes rise, designed to ensure that people are always better off working and that those on low incomes do not face punitive effective tax rates when they seek to earn more. 
 
The government argues that the current system is too complicated and that work incentives are too low because of excessive rates of benefit withdrawal when people earn more. The universal credit, which will be introduced for new benefits claimants from 2013, would take all income-related benefits and tax credits for working age people into a single system with a single withdrawal rate, proposed to be 65p in the pound, as earnings rise. 
 
This withdrawal would have to be based on joint family income. But the universal credit, says Professor Gregg, still needs to address the residual entitlements to individual contributory benefits (based on National Insurance contributions made rather than an assessment of family needs), mainly short-term Jobseeker’s Allowance and incapacity-related benefits. 
 
Keeping these individual elements separate from the family-based universal credit would add considerable complexity, he says, adding that this would undermine the very logic of the reforms. He says the government has moved to make contributory access to incapacity-related benefits limited to a year. This saves money but also leads to many people losing entitlement to any financial support. 
 
The remaining individual contributory elements still add substantially to the complexity of the proposed system with two additional benefits outside the credit. He argues therefore that the expectation is that the remaining contributory elements in benefit entitlement will eventually go. 
 
Professor Gregg points to four additional fundamental design features that will be a problem with moving to a universal credit: 
 
– Many benefits are supplements for specific additional costs. 
 
– Different elements of the current system are re-evaluated at different intervals. 
 
– Out-of-work benefits come with conditionality. 
 
– The out-of-work welfare system and the in-work tax credit system create sharp incentives to work a minimum number of hours. 
 

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