Universal Credit and the Save the Children Report.
Save the Children’s recent report on Universal Credit raises some important and valid concerns about the new benefit system, but unfortunately it also fails to recognise some necessary trade-offs that the government has to make. Save the Children (and other welfare rights groups) recognise the need to overhaul the existing benefit system and the positive impact that Universal Credit will have on the vast majority of benefit claimants, including the majority of lone parents and I welcome their proposal to increase work incentives over time (55% taper).
However, their report risks misrepresenting the argument on incentives. Their modelling shows that UC may negatively impact specific groups of benefit claimants making specific decisions. They fail to acknowledge that under the current system, parents working 16 or 30 hours each week benefit at the expense of those working only 12 or 24.
Under Universal Credit, work incentives are spread evenly and on the basis of income, with claimants keeping a fixed percentage of every pound they earn. Under the current system, employees finding fewer hours in a given week risk losing their tax credits. Similarly, many employers report that they would like to give their best workers, single mums, more work but are told that they can’t take it because it will jeopardise their tax credits and they risk being worse off. Universal Credit should mean that households and employers decide on the number of hours they work, rather than the decision being left to bureaucrats, as in the tax credit system.
The report also argues that second earners will be worse off, ignoring an important trade-off between second earner and household incentives. Society as a whole benefits more when a workless household becomes a working household, incomes increase, poverty falls and more children grow up with at least one working parent. Helping second earners (through a separate disregard for second earners) helps better off households. Instead the Government, rightly, made a conscious decision to concentrate rewards on the poorest households, those moving into work. Money spent on second earners could instead be used to increase the household disregard, supporting single earner households and lone parents as well as two earner households. Finally on this point, under Universal Credit, both adults have the same incentives to work, if anything the second earner may have a higher incentives because of their personal tax allowance.
The report also calls for higher disregards for lone parents. While this may be justified because of the additional costs of work that some lone parents may face, for example a need for formal childcare, it is important to remember that disregards are higher under Universal Credit than under the current system. The Government could instead improve work incentives for all (by lowering the taper rate) and allow people to keep more of their earnings from work. The taper rate is an effective lever with which to tackle poverty, and a clear signal from the Government that they want to reward work.