The progressive potential of Universal Credit

Universal credit has one abiding message that comes through loud and clear: work good, benefits bad. It’s structured to reduce the obstacles to taking a job, increase work incentives and ensure that claimants make efforts to move up the progression ladder.

None of this is anything that most low-income families would disagree with. Forthcoming Child Poverty Action Group (CPAG) research shows that even if their total income stays the same, the vast majority of poor parents would much rather be working than not. People we interviewed spoke of the sense of self-esteem even low quality work gives them, the value of ‘getting out of the house’, and the importance of being good role models for their children. Contrary to prevailing perceptions, low- income parents are motivated to work and good to go.

Hurray for universal credit then, with its promises to make it easier to work and make it pay. But there’s a problem: if we look beyond work for work’s sake, and also expect it to solve our growing poverty problem, it’s not clear it is up to the job.

Consider the new research from the Social Mobility and Child Poverty Commission, which modelled the poverty payoff we’d get from various changes to employment in the UK. What would child poverty rates look like, for example, if the national minimum wage was increased? If we saw higher levels of parental employment? Or if low-income parents worked the number of hours universal credit insists is right for them? The answer, in each case, is, a bit lower than now but not as much as you’d think.

For those of us who have little to do with the benefits system, this doesn’t seem to make sense. If we worked more, took on longer hours, or got a rise, our incomes would certainly go up. But for those on universal credit, it doesn’t quite work like that. So why not?

To begin with, the new system allows those on very low earnings to keep all of their salary without their universal credit award being affected. But, very quickly, a steep withdrawal rate kicks in – when earning a bit more than £51 a week for a couple family, and just over £60 a week for a lone parent. Critically, the value of these levels (or ‘work allowances’) has been frozen for three years, and so is diminishing in real terms. As a result, families claiming universal credit will feel even less of the full benefit of working more as time goes on.

Second, once families are earning beyond their allowance, the amount they actually earn from working is pretty small. When they lose 65p of their universal credit award for every extra pound they earn (and then pay tax and national insurance too), it’s easy to see how working more doesn’t necessarily translate into money in pockets for those on low incomes, or a reduction in poverty to boot.

A recent TUC-CPAG project has shown that we can tinker around with universal credit as much as we like, but that won’t do much for poverty rates. Instead, if we seriously want the policy to be genuinely progressive, work must become a real route out of hardship. Unfreezing the work allowances and decreasing universal credit’s withdrawal rate need to be the reforms at the top of the pile. Combine this with an uplift to the national minimum wage (which would generate more revenue for the Treasury from increased tax receipts that could be used to pay for the more generous allowances and taper), and we might actually be back in the business of reducing poverty.

Tackling child poverty requires just a little bit more action, however. Wages don’t reflect family size or respond to the growing cost of a child. Earnings have to be spread further in families with children, making it harder for parents to achieve an adequate income through work alone.

Enter children’s benefits, designed to help parents smooth the cost of children over the course of their working life. An additional poverty-reducing step, then, would be to recognise the critical importance of the children’s element of universal credit for low-income families, and restore its value to its 2010 level. According to the TUC-CPAG analysis, this would reduce child poverty rates by two percentage points in one fell swoop, putting us back on track to meeting child poverty targets.

If the intimate relationship between work and benefits is to function as envisaged by universal credit, freezing allowances or increasing the taper are definitely steps in the wrong direction. But we should also recognise that the basic value of awards needs to be adequate, and that support with the costs of children should remain a critical part of the poverty-reduction tool kit.