The Joseph Rowntree Foundation report launched today, Does Universal Credit Enable Households to Reach a Minimum Income Standard?, is a reasonable analysis of the impact of Universal Credit (UC).
However, its portrayal by Polly Toynbee in the Guardian as being wholly critical of Universal Credit is unfair. Policy in Practice were at the launch, this post summarises the policy discussion after the launch event.
The report’s general findings are well known: that UC is broadly similar to the current system in terms of income adequacy, but that it provides greater returns for households moving into part time work, below the tax credit hours-rule thresholds, and that low wages lead to income inadequacy. The launch focused on a specific challenges facing UC, the ‘plateauing’ of disposable income despite higher earnings due to a combination of UC withdrawal, income tax and national insurance and the high cost of childcare. Policy in Practice have argued that to tackled this, the government need to slow the withdrawal of Universal Credit – so low wage workers keep even more of their earnings from work – We argue that the reports findings, though valid, overstate the problem and fail to identify the most effective solutions.
In 2010, families claimed ~£125 per week in childcare support and around around half of families combine formal and informal childcare costs to minimise their childcare liability – (source). The proposed increase in childcare support in 2016 (to 85% for basic rate taxpayers) goes a long way to tackling the ‘plateau’ problem (as acknowledged in the JRF report). Finally, a knee-jerk response to increase support for childcare – without asking whether that is the best way to tackle poverty is problematic – that taxpayers can already payout more in childcare support than the parent goes out to earn (i.e. 2 children x childcare costs of £4.50 / hour, with 70% of costs covered is £6.30, higher than the minimum wage).
So what can be done? We would argue that:
- The best way to tackle the childcare crisis is to increase alternatives to paid for, formal childcare such as after school clubs, or support from friends and family.
- The best way to tackle the plateau effect is to lower the withdrawal rate of Universal Credit (to 55%), so people keep more of their earnings for each pound that they earn.
- The best way to spend any additional funds would be to tackle bigger problems facing Universal Credit, such as Free School Meals (cost £100m).
- Local authorities need to ensure that council tax support schemes integrate effectively with Universal Credit (the welfare reform club can help)
The rest of this post summarises the report, and the interesting points from the discussion following the launch event.
Universal Credit and the Minimum Income Standard: Summary
The Joseph Rowntree Foundation (JRF) released a report today called Does Universal Credit Enable Households to Reach a Minimum Income Standard? The report analyses the impact that Universal Credit (UC) will have on different family types and whether it will enable them to reach a an acceptable standard of living, as determined by the minimum income standard.
The report looks at two different aspects of Universal Credit: its ability to help families achieve an acceptable standard of living and its ability to ‘make work pay’.
An Acceptable Standard of Living
The report defines an acceptable standard of living by using the JRFs Minimum Income Standard (MIS). The MIS is determined by surveying the public to find out what goods and services are necessary to reach a minimum standard of living, then calculates the cost of this basket of goods. It includes not just bare necessities like food and clothing, but things that the public deems as necessary to participate in society.
The report looked at the ability of different (specific) family types to reach the MIS under Universal Credit. They found that:
- Single adults with no children who work full-time could not reach the MIS on the minimum wage, and can just about reach it on a lower quartile wage (£7.95). On a median wage (£11.26/hr), they could reach 150% of the MIS.
- Couples with no children (assuming both partners are on the same wage), when the second earner works full-time, are able to reach the MIS even on the minimum wage. On the median wage, they can reach 200% of the MIS.
However, the report argues that families that need to pay for childcare have a much more difficult time reaching the MIS due to the high cost of childcare, as illustrated in this video.
- Lone parents with one or two children in childcare would be unable to reach the MIS even when working full-time on the median wage.
- Couples with two children cannot reach the MIS on the minimum or lower quartile wage, even if both parents work full-time. Earning the median wage, the couple could reach the MIS when the second earner is working around 18-22 hours, depending on the age of the child.
Making Work Pay
The report argues that for households that depend on childcare, UC taper rates compounded with national insurance, income tax and the high cost of childcare mean that disposable income varies little with increased earnings. For example, an extra hour worked on minimum wage yields about £1.50 (after tax and UC withdrawal). An hour of childcare costs about £1 net of UC support, meaning that the parent would have 50p extra disposable income from working an extra hour. The high cost of childcare therefore serves as a strong work disincentive.
Universal Credit vs. Tax Credits
Neither system represents an improvement or deterioration in income adequacy across the range of working hours for any given household type. Universal Credit can provide some low-earning households with higher disposable incomes compared to the current system, especially when working part-time. However, for some households, particularly those in full-time work with childcare needs, they will have a lower disposable income under Universal Credit. In general, the report finds that Universal Credit helps to strengthen the incentive to go from no work to some work, but in many cases weakens rewards for additional work.
Summary of discussion at the launch of Does Universal Credit Enable Households to Reach a Minimum Income Standard?
- In-work conditionality: Does in-work conditionality contradict the flexibility of Universal Credit? How ‘fair’ is in-work conditionality when you are not financially better off working more hours? Is the in-work conditionality regime any more onerous than entitlement to tax credits today? Does it simply make a problem that exists today (progression in work) more transparent? Should the state take a view on whether people already in work should work more, or does it have a responsibility to encourage people to increase their skills and their earnings?
- Childcare: What is the best way to tackle high childcare costs? Should the government increase the subsidy for childcare, or are there better ways to tackle this problem? If you could spend £200m on Universal Credit, how would you spend it?
- Passported Benefits: Is it possible to avoid creating another cliff-edge with the withdrawal of passported benefits (such as free school meals)? What should the threshold be?
- Poverty Reduction: UC does not just aim to ‘make work pay’, but also to reduce poverty. How will the DWP measure this?
- Council tax support: Will council tax reduction schemes worsen the plateauing effect? How can they be encouraged to adopt sensible schemes that support a move into work? (the welfare reform club have done some work on this point)