Could Universal Credit could help reduce child poverty?

New TUC research suggests ways that the controversial scheme could be made more effective

 

Research published today by the TUC and Child Poverty Action Group (CPAG) suggests that child poverty could be reduced by channelling support through Universal Credit (UC), rather than by raising the income tax threshold.

The report, Reforms to Universal Credit, looks at alternative options for helping low income families that would cost almost the same as immediately raising the income tax threshold to £12,500.

Ranking 13 options, the report finds that the tax threshold proposal cost by far the most, yet came bottom of the list for its child poverty reducing potential.

The other 12 options investigated would improve UC to varying degrees in one of three ways:

1. Reducing the taper rate – the rate at which UC is reduced when a person’s earnings increase. It is currently set at 65 per cent – so if a claimant’s pay goes up by £100 they have a net gain of £35, because their Universal Credit payment is reduced by £65. So the lower the taper rate, the stronger work incentives are.

2. Increasing work allowances – these ensure that some earnings each month are unaffected by the taper. The amount of the work allowance varies according to family composition and circumstances, and the higher the work allowance, the stronger work incentives are.

3 .Increasing the child element – currently this is set at £277.08 per month for the first child and £231.67 for second and subsequent children. The TUC’s research found that increasing the child element would have the strongest impact for reducing child poverty.

The TUC and CPAG conclude from their research that the most effective approach would be a package of measures combining all three options.

For example, they say a £13.6bn package of improvements that (1) cut the taper from 65 per cent to 55 percent, (2) increased work allowances by £80 a month, and (3) increased both the child element and the disabled child element by £40 a month each, would achieve a direct reduction in child poverty of 460,000 children.

TUC general secretary Frances O’Grady said:

“The government is right to think about giving more help to people in work on low earnings, but the chancellor should look carefully at the most effective way of doing it before making a final decision on raising the tax threshold.

“The taper in Universal Credit acts like a tax rate of 65 per cent on low-paid workers, so it makes good sense to prioritise reducing it. We’d also like to see other improvements, like a higher work allowance and higher child element.

“All along we’ve been told that the great thing about Universal Credit is how easy it is to make policy changes that boost work incentives and reduce poverty. With more and more people moving across to universal credit, it would be strange for the government to ignore its full potential for making work pay and reducing poverty.”

Chief executive of the CPAG Alison Garnham said:

“Rather than committing billions on the costly and poorly targeted policy of raising the personal tax allowance, the Treasury should stop starving Universal Credit of the investment it needs to fulfil its poverty-reducing potential and justify the massive upheaval surrounding it.”

Ruby Stockham is a staff writer at Left Foot Forward. Follow her on Twitter

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