Work and business: Fixing Universal Credit

Many like to depict universal credit (UC) as the great British cock-up – a wasteful white elephant that is over-budget, over-time and over-sold by the current government on every occasion. But beyond its many management failures so carefully documented last year by the National Audit Office, is UC a good idea? And perhaps more pertinently given the policy is here to stay, how can future governments modify the new benefit to ensure it delivers as best it can?

Universal credit has three overarching objectives: to simplify the benefits system; to make work pay; and to reduce worklessness and poverty. Anyone who cares about low-income families will give all three a big cheer. Yet a careful assessment of UC shows that the new benefit suffers from various internal tensions: while aspects of its design are fully in line with its ambitions, others militate against success.

Consider its first aim of simplification. Integrating multiple benefits undoubtedly makes life easier for many – one form instead of many to fill out to claim, no clunky transitions between different benefits as circumstances change. The automatic transfer of earnings information from HMRC to DWP is an improvement too, removing the burden of self-reporting and the risk of erroneous awards that later have to be repaid. But beneath the smooth facade UC remains an incredibly complex benefit: the fact that the UC regulations run to over one hundred pages testifies to that.

In truth, it’s hard to design complexity out of any heavily means-tested benefit. But what would make the UC experience better for claimants would be to soften its administrative intransigence. Why, for example, insist that couples make a joint claim? That payments can only be made to a single household member? Or that awards be paid on a monthly basis because this ‘looks like work’? Giving claimants a choice about how they can apply for, and be paid, UC allows them to decide what would make life simpler.

Universal credit is widely touted as always making work pay and for some, the new benefit certainly represents an improvement on the current system’s work incentives. Gone will be the days when almost every penny of earned income leads to an equal reduction of state support. But UC modelling rarely takes into account the broader realities of families’ lives. It fails to factor in the costs of work such as childcare and travel, for example, or for the way that other benefits such as free school meals or council tax reduction schemes will cease when a certain level of earnings is reached.

Without addressing these issues, then, the smooth UC taper will be a fallacy – there are points in the system when it still won’t make good economic sense to earn more. But perhaps more worrying still is the balance UC currently strikes between those earning very small amounts – either as a result of low wages, low hours or both – and those further up the earnings scale. Without a doubt, those who benefit most under UC compared to the current system are those in ‘mini-jobs’, on sporadic contracts, or working variable hours.

And herein lies a critical tension. This frontloading of work incentives within UC is unquestionably in line with its third aim of reducing worklessness, making it worthwhile at least for the first earner in a household to take up any job at all. But it falls foul of the final clause: to reduce poverty. With more than half of the 13 million people living in poverty in the UK in a working family, we know that simply moving people from the unemployed to employed category in the national statistics doesn’t solve the poverty problem.

What UC needs to do, then, is to incentivise not just any kind of work but work – and work patterns – that we know are poverty reducing. Incentives need to be strengthened at the higher end of the UC distribution by reducing the taper rate; an additional disregard is necessary to ensure it makes sense for second earners to work; and claimants need support while they train as well as work to enable them to progress in the future.

This is all a tall order of course, and one that isn’t cost-free at least in static terms. But more importantly, we should remember that the social security system can’t solve all of our problems. It can’t magic up better paid jobs that don’t exist; it can’t incentivise employers to provide quality work with a steady income; and it cannot ensure jobs have an in-built progression path. Without attention to these broader structural factors, UC will fall flat on its face through no fault of its own.