Protecting Universal Credit work allowances is critical to the welfare reform agenda

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Last week Deven Ghelani and the team at Policy in Practice were asked to provide a briefing note to Lord Kirkwood in support of a proposed amendment to the Welfare Reform and Work Bill calling for the repeal of Universal Credit work allowances cuts.

The debate, at the House of Lords on 27 January 2016, featured the our analysis.

The strategic balance in the architecture of the system

Policy in Practice analysis featured in the Welfare Reform and Work Bill debate last weekIn the debate Lord Kirkwood said “What we are arguing about is part of the strategic balance in the architecture of the system.

“We have to get the architecture right before the scale-up starts, and work allowances are an essential ingredient.”

Talking about the analysis provided by Policy in Practice, Lord Kirkwood said “I will very briefly sketch through some analysis I have seen from Policy in Practice, a group of people whose judgment I trust.”

Forecasting the effects of the impact of Universal Credit on recipients

Our preliminary analysis focused on the cuts to work allowances within Universal Credit that were announced in the Summer Budget 2015, alongside changes to the personal allowance and the introduction of the National Living Wage.

  • 96,000 households in work and on Universal Credit will be worse off April 2016
  • One-third of households will be worse off in 2020 without transitional protection
  • Cuts to work allowances will limit the dynamic impact of Universal Credit

We argued that the Government should maintain support for work incentives within Universal Credit.

Work allowances reward the lowest earning households in work, many of whom will not benefit from the higher personal tax allowance, or the National Living Wage.

By introducing these cuts, the Government is prioritising the public finances over people’s personal finances, and by failing to reward entry into work it is also failing to reward personal responsibility.

Universal Credit will simplify the benefit system, but introducing these cuts to work allowances will not help to make work pay for low earners.

This is exactly the group the Universal Credit is being introduced to support.

The Government should be seeking to be the party that supports people in work, including low earners, and not only be a party of low taxes, but of low effective taxes.

The context to the changes to Universal Credit

UC changes from April 2016- Fig 4_Savings from changes to tax credits and Universal CreditThe Government’s manifesto platform was based on tackling the deficit, reducing spending on welfare, and reforming welfare to make work pay.

Overall its reforms to the welfare system have been popular, including the benefit cap and Universal Credit, which have had broad support.

The Summer Budget announced a package of measures designed to build a high wage, low tax, low welfare society.

These included changes to tax credits to make them less generous, which were reversed, and cuts to work allowances within Universal Credit systems to make it less generous for working families, which were not.

These were to be implemented alongside a higher minimum wage and income tax allowance.

  • Personal allowance raised to £11,000, increasing to £12,500 by 2020
  • National Living Wage set at £7.20 per hour, increasing to £9.00 by 2020
  • Work allowances in Universal Credit were eliminated for families without children or disabilities, and reduced for nearly all other households

The changes to Universal Credit work allowances exclusively affect households that are in remunerative work.

As our analysis shows, the option to increase working hours may be limited, due to weaker dynamic effects of Universal Credit, and the introduction of the National Living Wage.

The Government has argued that when viewed as a package of measures, the positive effects of a higher minimum wage, a higher tax allowance and additional support for childcare offset the reductions for those on tax credits.

Policy in Practice analysis of the impacts

Our analysis uses the family resources survey to build a picture of the impact that these changes will have on UC recipients nationwide.

It takes into account the cumulative impact of these changes on individual households, including the net impact of higher wages, and an increased personal allowance on the UC award.

We compare income in 2015 to income in 2016 and 2020, all calculations are carried out on a nominal basis.

We carry out similar analysis for local authorities, helping them to understand the impact of policy changes on individual households.

We help them to build a clear picture of income, employment and poverty in order to proactively target the right support, to the right people for maximum impact on society.

The impact on Universal Credit recipients

1. 96,000 households in work and on Universal Credit will be worse off in April 2016

Number of households worse off
Number of households worse off

With no mitigation plan in place for people currently on Universal Credit, all households in work and on Universal Credit in April 2016 can expect to be worse off as a result of reduced work allowances.

The analysis is based on DWP figures that show 37% of households on Universal Credit are currently in work, and an estimated 260,000 households will be on Universal Credit in April 2016.

2. One-third of households will be worse off in 2020 without transitional protection

Our analysis finds that taking into account the National Living Wage and higher personal allowance, 35% of Universal Credit recipients will be worse off without transitional protection in 2020.

This figure falls to 30.5% if we take into account childcare for 3-4 years olds, and assume that each of these households are better off.

While some households clearly benefit from mitigation measures, those that earn above the National Living Wage and earn below the higher personal allowance have no mitigation in place.

3. Cuts to work allowances will limit the dynamic impact of Universal Credit

The productivity challenge
The productivity challenge

Households that are worse off under Universal Credit combined would need to work additional hours, in order to be no worse off. Our current best estimate puts the figure at an additional ~10m hours each week.

At the same time, cuts to work allowances will limit the dynamic effect of Universal Credit by up to 2.5m hours each week, and the OBR estimate that the National Living Wage will reduce weekly hours available by a further 1.8m hours each week.

Combined, these factors will make it difficult for households to make up their shortfall by working additional hours.

Making work pay

Policy in Practice recognises that the Government was elected to tackle the deficit, and reduce welfare spending.

It was also elected to reform the welfare system to make work pay.

Promoting work incentives within Universal Credit rewards enterprise and endeavor, helps lower earners, and can aid progression in work.

Protecting work allowances within Universal Credit protects this government’s flagship welfare reform, and more importantly will protect the personal finances of low earners, already in fragile financial circumstances as they transition onto the new benefit.

Further reading

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