From the TUC

Official: Universal Credit is “less generous” than tax credits

12 Oct 2016, by in Society & Welfare

For the first time, an authoritative statutory body has recognised that the cuts to Universal Credit announced in last summer’s Budget will mean that it is much less generous than was originally planned, making it effectively a cut when compared with Working Tax Credit and Child Tax Credit which it replaces.

Back in 2010, when the government announced that it was going to replace all the means-tested benefits for working age people, including the tax credits with one new benefit, Universal Credit they claimed that, compared with the tax credits:

  • “Universal Credit could lift as many as 350,000 children and 500,000 working-age adults out of poverty. This is before we consider the positive impact of more people moving into work.”
  • “In the bottom decile, the average impact of Universal Credit will be to increase net incomes by around 1.5 per cent – a cash value of £2.40 per week. In decile two this figure is around 1 per cent, which equates to more than £3.60 per week. This is before we take the impact of increased take-up into account, so is likely to significantly understate the gains to those on the lowest incomes.”
  • “We expect to see average net incomes reduce in the long term in only deciles 7 to 10 [the richest deciles], and even there the average reduction will be small – less than 15 pence per week in deciles 8 to 10.2”

The Institute for Fiscal Studies confirmed that UC would take hundreds of thousands of children and adults out of poverty. Together with the creation of a single taper for all means-tested benefits, was, on balance, progressive. The TUC and most anti-poverty organisations welcomed it (warily). Since then, just about every change announced has made UC meaner. Last summer’s Budget was the worst of all, Mr Osborne announced cuts due to cut spending by 2020-1 by £4,887 million:

  • Very substantial reductions in the work allowances (the amount that can be earned before UC is ‘tapered’ away);
  • Limiting the child element to two children for new claims and births; and
  • Removing the first child premium for new claims.

These are huge cuts and there was an outcry against them. But most of the political debate focused on the tax credit cuts because they would have started hurting this year. The government was therefore able to get away with announcing that it was reversing these cuts but keeping the equivalent UC cuts. It’s been clear to most of us policy wonks this meant that the positive potential of UC is now mostly lost and it represents a step backwards, but it’s been very hard to get any sort of official acknowledgement that the claims made for UC in 2010 are no longer true.

Until yesterday, that is. The Office for Budget Responsibility is independent, but it’s paid for by public funds and what it says is usually quoted in the Budget reports. Yesterday they published their latest Welfare Trends report from the OBR is the first official acknowledgement of the new situation. And they don’t just say it once:

  • “As universal credit is now less generous on average than the tax credits and benefits systems that it replaces, the rollout of universal credit is expected to reduce spending.”
  • This is mainly due to the July 2015 cuts (para 10)
  • Especially the cuts in the work allowance (para. 4.21.
  • “[T]he transition to universal credit is now expected to reduce spending by £3.1 billion in 2020-21 [relative to keeping tax credits in place].” (para. 4.20)

This is such a shame. Firstly, the one policy that, for all its many faults, had some real progressive potential is no longer acceptable. But secondly, and more importantly, as Alison Garnham of the Child Poverty Action Group pointed out in an excellent article in today’s Guardian, the IFS is now forecasting that the number of children living in poverty is likely to rise by a shocking 50 per cent by 2020-1.

Alison was writing in support of an excellent new CPAG collection of essays published today, Improving Children’s Life Chances. “Life chances” is, as CPAG puts it, “a central motif of this government’s social policy”, and I agree that it’s a very good way to look at child poverty. (Full disclosure: back in 2005, I was a member of the Fabians’ Commission on Life Chances and Child Poverty.)

Now, I would say that a life chances approach requires a multi-dimensional approach that takes into account social exclusion, racism and other forms of discrimination addresses issues like isolation and social capital and which is dynamic, taking into account a society’s direction of change. The essays in Improving Children’s Life Chances do an excellent job of taking up the challenge of this many-layered and cover health, early years, housing, education, family life and the transition from education to work.

But I have to enter a caution: ‘life chances’ should never be an excuse for failing to prioritise child poverty or for trashing the Child Poverty Act’s prioritisation of relative poverty. When you have predictions that a government is going to see a 50 per cent increase in child poverty, and the Universal Credit cuts make that so much more likely there is obviously going to be a strong temptation to defeat child poverty by changing the definition of poverty. (I’m strongly inclined to believe that the focus on social mobility is an attempt at this sort of political misdirection.)

With that in mind, I was rather heartened by David Willetts’ foreword. Like everyone else, I think he’s one of the most intelligent Conservatives; more importantly, he really seems to care about poverty and fairness. He poses a good question:

“Imagine that the Prime Minister were to say: ‘The government will allocate an extra £1 billion a year to boosting the life chances of the lowest income families in our society.’ And then went on to ask: ‘What is the best way to spend that money?’ We are still some way from being able to agree an answer to that question. I rather suspect that if there were such an answer, with the evidence to back it up, it might be more likely that the question would be asked.”

This isn’t what someone getting their retaliation in first would say. It’s a good question to ask – I remember once squirming when a senior official asked me a very similar question. And Willetts’ last sentence in that quotation is particularly important. Every politically aware person knows that the fiscal environment is about to get harsher; the fact that a well-connected and informed Conservative thinks the question might one day be asked one day suggests we have some hope of avoiding disasters like last summer’s Budget.

2 Responses to Official: Universal Credit is “less generous” than tax credits

  1. Gary Vaux
    Oct 14th 2016, 10:28 am

    Its interesting how Iain Duncan Smith has been portrayed as the ‘bad guy’ in the implementation of UC and yet it is Treasury who have pushed through the changes that have taken UC from having a net cost, to making a net saving. His original proposal of a 50% taper and more generous work allowances would have given the opportunity to lift families out of poverty (even if not be a great deal). A 65% taper and the virtual abolition of work allowances undermine that concept almost completely. There is much to commend in UC – and much that needs urgent reform – but the fundamental design as it currently stands is a testament to a political and economic theory that is rapidly falling into disrepute.

  2. Gail ralton
    Nov 4th 2016, 7:35 am

    Labour were meant to ve seeking advice re a lefal challenge in december 2015. outcome? I cant find anything. finished a degree got forced onto universal credit…dont qualify for teansition period as change in circumstance. thiusands of pounds worse off working 20 hours a week as a result. I feel disxriminated.