This week’s Budget was an opportunity for the Government to signal support for low-income households at the beginning of this parliament. Whilst there were a handful of well-targeted and welcome welfare initiatives, it was infrastructure projects and the response to the Covid-19 virus that took centre stage. Policy and Data Analysts, Sam Tims and Duncan Hatfield take a look at what Budget 2020 means for low-income families.
Most of the welfare initiatives introduced in the Budget this week are targeted at small groups of households. Whilst these measures will certainly have a positive impact on people affected, they are unlikely to have a measurable impact on the proportion of households in the UK living in poverty. Initiatives that may see a wider impact include the recovery of advances at a slower rate and the extension of the National Living Wage to those under 25. The key changes to welfare provision introduced in this budget, listed here, are explored below.
- Universal Credit advances will be recouped at a slower rate
- Big boosts to the National Living Wage for the young
- Vulnerable groups will receive more towards their rent
- The lower surplus earnings threshold is delayed again
- EEA citizens are at risk of losing access to non-contributory benefits
- Carer’s leave is coming
- Coronavirus played a big part, with several temporary measures announced
1. Universal Credit advances will be recouped at a slower rate
One of the most welcome provisions is the reduction in the rate at which advances or debt can be deducted from a Universal Credit award. Initially, these were capped at 40% of the UC standard allowance and then, earlier this year, the cap was lowered to 30% of the standard allowance. The budget announcement goes further still by taking the cap down to 25% of the standard allowance. Alongside this, the recovery period is being extended to 24 months.
Recouping advances at a slower rate will improve the financial resilience of low-income households, with the average take-home income increasing by £18 per week.
These changes have an impact on the amount of advance a claimant can receive at the beginning of the five-week wait. This is because the maximum advance possible is the highest of full UC award or the recovery rate multiplied by the months of recovery. Changes announced in this budget mean that the maximum advance will increase by 25%. For example, the maximum advance for a single person aged over 25 would have been £1,551 as of the new financial year. This has increased to £1,939. This only affects those with full UC awards over £1,551. Policy in Practice’s analysis taken from a representative sample of local authority administrative data shows that this is likely to affect approximately 2.6% of households eligible for Universal Credit.
While an increased advance will offer more support to some households, our experience, and that of the wider sector shows that for many low-income households, the repayment of advances can push households into deeper levels of debt. For some households access to a loan at a point of crisis will be a lifeline, but if Universal Credit is to act as the best possible safety net as households move into and out of work, then another mechanism needs to be offered to those for whom a loan could cause further crisis.
Yesterday the Chancellor missed an excellent opportunity to set out an alternative strategy to support households through the five-week wait. This strategy could have introduced grants for more vulnerable claimants, with flexible advances still available to those for whom it would benefit. The five-week wait must be urgently addressed, and until it is, Universal Credit will not work as the safety net that it was designed to be.
2. Big boosts to the National Living Wage for the young
One of the biggest changes that will affect low-income households is the Government’s objectives for the National Living Wage. As part of the budget, the Chancellor announced that the national living wage will be extended to 23 and 24 year olds from April 2021, with a target to extend this further to all those aged 21 and over by 2024. This is combined with a target to increase the NLW to two-thirds of median earnings by 2024, estimated to be £10.69.
This will have a significant impact on young low-income households. A 23 year old working full time on minimum wage and in receipt of Universal Credit might be £57.24 better off each month by April 2021, and by 2024 a 21 year old in work could be £114.10 better off.
The chart below shows the impact of these changes for a 23 year old with two children and the impact that an increased minimum wage would have if applied today.
In addition to the higher earnings to the household, this provision will also see households move faster out of state support. As there are over 3 million 18-24 year olds currently in employment, the government may wish to consider applying this provision before 2021 and 2024 in order to tackle in-work poverty while simultaneously reducing welfare spend.
3. Vulnerable groups will receive more towards their rent
Another welcome announcement will extend the exemptions from the Shared Accommodation Rate to specific vulnerable groups. Up to now, the rent for single people under the age of 35 in private rented accommodation was capped at the amount for a shared room, even if they lived in self-contained accommodation. Some people were exempt from this including rough sleepers over the age of 25 and care leavers up to the age of 21. These age bands have been extended. The budget obtained provision for the exemption for rough sleepers aged 16-24, care leavers up to the age of 25, and victims of domestic abuse and human trafficking. The extension of exemptions from the Shared Accommodation Rate will have a significant impact on preventing homelessness amongst these groups. Previous research from Centre Point highlighted that 14% of care leavers have slept rough and the Government’s 2019 snapshot of rough sleeping shows that 5% of rough sleepers were under 25.
The additional exemptions will bolster the financial resilience of those affected. For example, a 23 year old care leaver in a self-contained flat in Camden could expect to see their housing support almost double, with an increase from £144.84 per week to £276.51 per week.
The Chancellor also recognised that “housing costs are the biggest pressure on household finances for low income households”. However, there was very little substance to help alleviate this issue, in particular, the Chancellor failed to address the cap on support for private rented accommodation that exists with the Local Housing Allowance (LHA).
As our recent analysis for the Local Government Association shows, only 13% of market rental rates in the UK are below this cap. Our research showed a robust link to homelessness; for every 1,000 households with a shortfall between their rent and the LHA rate, 44 households will require temporary accommodation. In 2016 the LHA rate was set at the 30th percentile of local market rents and this cap has been retained since then as part of the freezing of benefit support under the austerity agenda. This freezing of LHA rates has a measurable impact on homelessness and also driven up associated costs to local authorities. Policy in Practice, along with other organisations working with low-income households, has called for realigning rental support with the 30th percentile of market rents. This budget provided a very welcome boost in investment in social housing but was also a missed opportunity to deliver greater support to low-income renters.
It is worth noting that the omission of any change to the LHA rates means that the burden of support continues to fall on advice agencies and local authorities. Local authorities have been developing pro-active support for those affected by the LHA rate and at risk of homelessness through the use of data analysis, an example of which is our work with Luton Borough Council. Councils will welcome the additional £400m announced in the budget to address rough sleeping but also require further support aimed at prevention. As rental costs continue to outstrip inflation there is an urgent need for the Government to address this rental support shortfall at the earliest opportunity.
4. The lower surplus earnings threshold is delayed again
The Universal Credit regulations contain complex clauses about the treatment of an increase of earnings. This increase causes future UC payments to be reduced on the assumption that the claimant will have put this increase aside to use in leaner months. The regulations governing this process are complex for both welfare advisors and claimants to understand. The Government made a sensible decision to temporarily raise the earnings fluctuation level at which these regulations will come into play from £300 to £2,500 and this has now been further extended to 2021. This delay will mean that fewer households will need to immediately navigate one of the more difficult elements of Universal Credit as they move from legacy benefits.
5. EEA citizens are at risk of losing access to non-contributory benefits
With the new immigration system recently announced, it was to be expected that access to benefits would change for those from within the EEA. As of January 2021, access to non-contributory benefits for EEA nationals will be aligned with from outside the EEA.
Even though this provision applies to new migrants from January 2021, this provision underlines the importance of those currently in the UK applying for settled status to ensure that their rights to benefits is maintained.
6. Carer’s leave is coming
An unexpected announcement was that the Government will be exploring the introduction of “Carer’s leave”, which will be available to those who are required to take time off work to care for a family member or dependent. At the time of the announcement there are no details on how this will work. It is presumed that it will act in a similar manner to Statutory Sickness Pay (SSP), creating a space for the person to return to employment if the need for care ends. It is hoped that it will also introduce support at an equivalent rate as SSP (£94.25 per week) and thus increase income for many who currently move from employment to Carers Allowance (£66.15 per week).
7. Coronavirus played a big part, with several temporary measures announced
Several headline announcements were temporary measures aimed at mitigating the impact of coronavirus. While the move to claiming SSP from day one rather than day four is welcome, the 2 million lowest-paid workers who have earnings lower than the threshold required for SSP and may also not be eligible for contributory ESA, may still be faced with a choice between losing a crucial source of income by taking time off sick or attending work and potentially worsening the spread of coronavirus.
Though the government may point to Universal Credit as an alternative source of income for this group, the 5 week wait means any households in this situation would have to apply for an advance. As advances are capped at what is repayable over the repayment period, it is not clear how advance repayments would work for people who are only very briefly in receipt of Universal Credit before they return to work. More details will need to be given on how the DWP will deal with advance repayments to ensure those looking to prevent the spread of the virus are not punished financially for their diligence.
With the DWP and JCP already struggling to administer the complexity of benefits correctly, these temporary measures, not least the commitment for JCP to deal with all claims over the phone or online, may also add further stresses to the system and the additional £0.1bn increase for the DWP is unlikely to be sufficient to cover this. More widely, the need for these temporary measures brings into question whether existing sick pay regulations are fit for purpose. If Universal Credit needs to be significantly tailored in response to more people taking time off sick, with some elements such as the Minimum Income Floor even temporarily suspended, it may not be as flexible and responsive as it aims to be. Given illness-related underperformance is estimated to cost the UK economy up to £91 billion annually, considering whether some of these measures could become permanent might also be of benefit to the wider economy.
A step in the right direction but more support for low-income families needed
Although expected and driven by current circumstances, the Government has missed an opportunity to show support to households in poverty and halt the reputational damage of Universal Credit. Noticeable by omission from the Budget was any provision to alleviate the impact of measures introduced as part of austerity, or to introduce alternative measures to address the five-week wait for Universal Credit support.