Universal credit is a disaster on almost every level. Its implementation has been catastrophic, its design is deeply flawed and it provides too little for struggling families. But it is a disaster that can be rescued, with common sense and money. It is time for politicians to decide if they want to save it.
Initially universal credit was presented as a disaster of delivery. Critics said they agreed with it in principle, but that its implementation was being bungled. The failing technology, delayed roll-outs and extortionate telephone charges have indeed caused huge problems. But UC’s flaws run much deeper, as the Fabian Society’s 2016 report For Us All revealed.
The attention paid to issues of implementation served to distract from how inadequate universal credit is in design, not just delivery. Merging six means-tested benefits into one may be a good idea in theory, but the way universal credit does it is intentionally wrong-headed. The Fabian report set out an action plan to save UC from itself – and in this post I propose 12 ways to rescue the new system.
Iain Duncan Smith, the architect of the system, deliberately designed Universal Credit to reflect the idealised lives he wanted people to live, not the complicated reality of getting by on a low income. Payments are made monthly, when managing money on a weekly basis is the reality for many. The share of UC designated for rent goes to claimants not to landlords by default, and is mixed in with the rest of the allowance. And people are expected to wait six weeks after they first claim, or borrow upfront to pay back later.
It is the deferred payment that is causing the most acute problems for families and at which MPs are rightly aiming fire. But all these conditions require super-human abilities of budgeting and planning for people without much cash. Duncan Smith and his ilk may say these rules are there to breed personal responsibility. But that is beside the point, because in practice they are leading to debt, distress and destitution.
These design flaws can be resolved even if the benefit becomes no more generous. UC can be reformed to cause a lot less misery, if it is paid in a way that is in sync with the budgeting pressures families actually face. Initial payments should be made up-front, people should be able to choose between weekly and monthly imbursement, and landlords should be paid direct, as a matter of course. All these changes could be made soon, if politicians decide to pause.
Other failings in universal credit are more fundamental and expensive to address. The main point of the new system was to make work pay, but the version of universal credit that the Treasury signed-off fails on just that count. After the 2015 election, the planned incentives for the first adult in each household to move into work were slashed. And even before then, when the policy was first announced, the second adult (usually a mother) stood to gain almost nothing by going out to work. UC needs to disregard more of people’s earnings to make sure that work pays for everyone.
The incentives UC offers for workers to earn more are even worse than the reward for a first move into work. Under universal credit recipients see most of every extra pound they earn clawed back in a benefit cut. It means that hundreds of thousands of low paid workers will barely take home any more when there is a rise in the national living wage. And it has led the government to invent a complex and probably unworkable scheme which mandates people to progress and earn more, because the financial incentives are not enough alone.
In 2016 the Chancellor sought to improve these incentives by reducing the rate at which UC is withdrawn as people earn more, from 65 pence of each pound of post-tax income to 63 pence. This is a tiny tweak of the system, however. Ideally the claw-back should be set at 55 pence, as was originally proposed. Even more importantly, council tax support should be merged into universal credit so people don’t lose even more money to local authorities when they earn an extra pound.
Improving the incentives UC offers to move into work and to progress in work will cost the government a lot, to the benefit of low-income working families. But with in-work poverty soaring this will be money well spent. It certainly represents a better use of scarce government resources than increasing personal tax allowances which benefit high income families far more than the working poor.
But the most serious flaw with Universal Credit is that it pays too little to people without work. The housing element of the benefit is frozen and no longer reflects the cost of a modest rent, so it is little wonder that landlords are increasingly reluctant to accept UC claimants. And the slice of the allowance designed to meet living costs is far too small.
The minimum income that the state provides a single pensioner after rent is £159 per week. But an unemployed 24 year-old receives just £58. This is less than the value of the tax allowances full-time workers receive each week, and is quite clearly inadequate to make ends meet in modern Britain. Meanwhile those disabled people who are unlikely to be able to work receive less than a pensioner for no good reason – and disabled people who are judged able to prepare for work get no more than people unemployed with no health problems at all, who are likely to spend far less time without work. It is the same story with children. Parents without work receive £85 per week to cover the costs of their first child but just £14 for their third child, following the introduction of the controversial two-child limit. The levels of all these payments need to be reviewed.
Without reform, the divide with pensioners will continue to grow, because pensions rise in line with earnings and inflation while benefits for children and working-age adults are frozen. The new inter-generational gap will widen until we increase all benefits on the same basis. Ideally universal credit should rise each year in line with earnings, so people on low incomes can share in the nation’s rising prosperity.
As things stand this is a pipe dream because universal credit is an arm of the government’s austerity policy. Spending on the benefit and its predecessors will fall from 3.6 per cent of national income in 2012 to 2.6 per cent in 2020. This is all the evidence you need that the fiscal deficit is being closed at the expense of low income families. By contrast, the share of GDP devoted to pensions and personal tax allowances is rising.
The financial outlook for low income families could be transformed, however, if ministers promised to peg spending on universal credit to increases in GDP. With more money flowing into the system to match rising national prosperity, the generosity of UC could be increased and all the design flaws ironed out.
So it is time for politicians to pause and think on universal credit. Right now a short-term, low-cost rescue plan is needed to end the worst distress. But after that, a new consensus must emerge to re-found universal credit, for it to make work pay, close the inter-generational divide and share the nation’s wealth.
12 ways to save Universal Credit
1. Pay the first month of UC up-front and end waiting days
2. Pay rent to landlords direct, as a default
3. Create the option to receive UC week-by-week
Make work pay
4. Increase the generosity of work allowances to encourage people to make a move into work pay and introduce a specific allowance for the second earner in a couple
5. Merge council tax support into UC with a single taper for withdrawing payments
6. Withdraw UC more gradually, for example with a taper of 55 pence not 63 pence in the pound
7. End the benefit freeze and then index increases in UC to earnings
8. Increase the generosity of UC payments, especially for (young) children, large families and parents aged under 25 – and during school holidays
9. For disabled people who have limited prospects of work, increase UC to match pension credit – and restore the extra payment for disabled people who are in a position to prepare for work
10. Index increases in UC housing payments to local rents
11. Set UC housing payments to fully cover the costs of (at least) 3 out of 10 rented homes in each area
12. Pilot a tenure-blind housing cost credit, which supports mortgage interest in the same way as rent