Universal Credit Paul Gregg CMPO, Bristol

Outline Universal Credit involves the integration of 3 major parts of the welfare system and has been motivated by an argument of a growth in welfare dependency which is out of control - assess state of welfare reliance - discuss differences between Labour and Con/Lib strategies - describe major structural reforms - discuss (some of the many) issues they raise

Welfare Reliance The numbers of working age families relying on benefits for most of their incomes tripled from 1979 to 1994 but far lower at the end of this recession (generosity of benefits relative to median earnings fell by 1/3) This can also be seen in the rise in the number of working age households with no earner - especially marked for families with children Yet overall employment in the working age population has remained broadly the same apart from cyclical movements at about 75% in 1968, 1979, 1990 and

Welfare Reliance Numbers Claiming Major Workless Benefits

Workless Households Trends: Each cycle has seen more workless households until this one Source Labour Force Survey G+W ONSONS excluding studentsall Children

Polarisation of Work Excess of workless households – % % % % % % %

Polarisation of Work Excess of workless households – Share of LP Lone Parents Couples in families with Kids %25.8%1.3% %31.5%2.8% %21.4% 1.3% %20.4%1.7%

Labours Strategy Labour Government took the evidence of growing numbers of children in workless families and argued that there needed to be: 1. Improvements in work incentives – both to work at all (Unemployment trap) and reduce the high Effective Tax Rates (poverty trap) 2. Support from National Minimum Wage and lower entry (10p) rate of tax/NI reforms (10p later abolished) 3.Job search Support (New Deals) and later post Conditionality for Lone Parents 4. Reducing Social exclusion (e.g. teen mothers) with high risk of being workless and poor 5. Increased generosity of support (in real terms) for families

Universal Credit Con-Lib coalition are outlining major reforms to welfare. Aims are: 1.To simplify the system 2.Improve Work Incentives and Reduce very high effective tax rates 3.Supported by reducing taxation for lower earners 4.Enhanced job search support (Work Programme) and conditionality 5.Reduced generosity of support (uprating only with CPI not RPI or Earnings) and reduced entitlements Very strong similarity in approaches (apart from no. 5)

Universal Credit Merges 1.The major adult welfare benefits into one single working adult age benefit 2.Housing Benefit 3.Tax credit system Into new delivery system via PAYE Each step is large on its own – all 4 in 1 step is mammoth administrative undertaking Issues 1.Work Incentives/ METRs 2.Simplification/Admin 3.Conditionality 4.Savings and Contributory Benefits

Welfare Incentives – present system

Universal Credit Universal Credit will combine adult benefits (JSA etc) with HB and tax credits into one means tested benefit with single withdrawal rate

Universal Credit 1.Incentives and METRs – Unemployment trap and poverty trap Uni-credit will raise incentives to work a little but reduces incentives to work more

Incentives Families with children – removes jump at 16 hours (will be 24 hours for couples with kids) but reduces value of second job because – in tax free zone credit withdrawal rises from 39% to 65% and lower support for childcare costs

Incentives Childless incentives to work <30 hours increase – so this increases incentive to work a few hours for those not working and for those who are to reduce hours worked

METRs Current (2010) system has 4 main benefits – 3 are taken away in turn as Gross earnings rise Adult benefits JSA/Income Support/ESA METR 100% Working Tax Credit – METR 39% (must work 16+ hours) Child Tax Credit - METR 39% Housing Benefit taken away at 70% of net of whats left So if on WTC and HB METR=82% (.39+.7*.61) If tax+NI, WTC and HB METR=92% ( *.3) If on tax+NI and WTC or CTC METR=70% ( )

Marginal Effective Tax Rates Typical Effective Tax Rate in 2010/11 is 70% (31p tax and NI + 39p in Tax Credit withdrawal) In budget 2010 tax credit withdrawal raised to 41p so typical METR rises to 72p Under Uni-credit norm rises to 76p (31p tax +.65*69)

Summary UC will 1.Raise work incentives for jobs at <16 hours for families with children (<30 hours for childless) So increased incentives to move into mini-jobs both for those not working and those working 16+ hours 2.Eliminate METRs >80% but Increase typical METRs from 70% to 76% reducing incentives to work more 3.Work Incentives for second earners fall due to higher withdrawal rate before paying tax and lower childcare support 4.Council tax benefit and passported benefits are not yet clear but will make picture worse

Universal Credit 2. Simplification Huge administrative upheaval Most people will claim single benefit but may additional benefits still in the system The Uni credit will be very complex once childcare, passported benefits, unearned income rules, permitted work rules etc etc

Universal Credit - Simplification 1.Mean most people will claim only one benefit 2. Disabled people will still get higher benefits – ESA WRAG for 1 year - ESA Support Group for ever 3. Housing allowances will still be based on actual rents in social sector and thus UC will vary by rent changes as well as housing moves and earnings changes - complicated 4. Separate contributory JSA (6 months) and ESA (1 year) will persist 5. AA, DLA etc outside system - CTB unclear

Universal Credit 3. Conditionality Conditionality currently applies differently to different JSA/IS/ESA groups - It does not apply to (in-work) tax credits UC will allow conditionality for out of work to move from being group defined to more flexible approach (personalisation) Not clear under UC how it will apply to in-work – not at all or an income/hours rule? Note incentive issues around ending 16 hour jump

Universal Credit 4. Savings/Contributory Entitlements

Universal Credit UC will 1. Not be open to those with savings over a limit (currently £16,000) whereas tax credits are not affected by savings 2. Place contributory benefits outside UC (ripe for abolition) Implication is that contribution increasingly no longer recognised and self protection (saving) penalised. Tax relief on saving low for low-middle income families – so disincentives to save.