Work won't neccessarily pay under the new system
As of today, Universal Credit (UC) is available at 50 per cent of Scottish Jobcentres. Meanwhile, the Resolution Foundation has published what is probably the most coherent and illuminating report on the scheme so far, recommending major reforms before it is rolled out any further.
The main concern raised by the authors of the report is that in its current form, UC does not provide enough of an incentive to start work.
The way UC works means that all benefits are taken away at a single rate once a claimant starts working. UC will introduce a work allowance – the amount someone can earn before they begin to have their benefits removed – and the flat 65 per cent withdrawal rate means that, for every additional pound a person earns above their work allowance, they keep only 35 per cent, until UC is entirely withdrawn.
While this is better than the current withdrawal rates of those receiving Housing Benefit and tax credits at the same time (this leaves people with less than 10p for every extra pound earned), the report rightly points out that this is is an incentive for people to work less hours.
The current system is designed to penalise low-hours work through working tax credits, which can only be claimed after working a certain number of hours. UC risks encouraging people to work below the allowance threshold, using the benefit as a safety cushion.
Therefore, the Resolution Foundation recommends adjusting and rebalancing the work allowance for different groups, including increasing the work allowance for single parents with housing costs from £3,100 a year to £5,100 a year, at a cost of £600 million; and removing the work allowance for non-disabled families without children, creating savings of £600 million.
It also urges the Department for Work and Pensions (DWP) to maintain a gap between the allowances for renters and home owners, in recognition of the different financial challenges they face. Because housing support is withdrawn more slowly under UC, the new regime is more generous to renters than to homeowners. The DWP has attempted to offset this by lowering the work allowance for families who rent.
This means that, particularly, single parents who rent their homes will find that their work allowances are used up after they have worked very few hours.
The Times has reported this story today with the headline ‘New benefits to get mums working’, but it is important to note that the Resolution Foundation, which researches the lives of low to middle-income families, believes that without its suggested reforms the people who would be discouraged from working are ‘overwhelmingly mothers’.
Many of the problems with UC’s current design come back to the endemic low-pay that has beset the UK labour market since the recession. According to the Resolution Foundation, ‘close to two-thirds of poor families with children’ already have someone in work, and the government’s own Low Pay Commission says that 1.4 million UK jobs are paid at or below the NMW.
Today’s report warns that the combination of removing the hour rules of tax credit and the new incentives for low hours work may trap people in low-paid, short-hour jobs, relying on the state to ‘top up their income’. Again, it is important to note that people who choose this work/benefits balance are not ‘scroungers’ but may find this to be the only way they can support themselves and their families.
It is, therefore, crucial that childcare entitlements also keep up with the changing system. The report says that ‘problems with affordability, availability and quality go well beyond the scope of this review’, but that in the short term, the government priority must prevent their policies dissuading parents, ‘particularly mothers’, from working.
Sticking to the wider strategy of only providing extra help to those who need it most, the Resolution Foundation recommends that support for parents with children under three should be increased, by raising the proportion of total childcare costs that can be claimed for in UC from 85 per cent to 95 per cent, as these parents currently receive no free entitlement even though childcare is more expensive.
Admitting that it is a complex and risky overhaul, the report nevertheless says that the motives of Universal Credit are ‘entirely honourable’. It concludes that:
“Through analysing the evidence, it became apparent to us that the policy focus in UC must shift from reducing worklessness to encouraging and supporting all members of a household into decent, sustainable work. Simply being in work is not enough; the objective must be to tackle endemic low pay.”
Ruby Stockham is a staff writer at Left Foot Forward. Follow her on Twitter