David Finch is Senior Economic Analyst at the Resolution Foundation.
The new Work and Pensions Secretary has been dealt a risky hand. Universal Credit (UC), the ambitious combining of six working age benefits into one, reaches a critical phase this month as the roll-out of a fully working system finally begins in areas that include Newcastle and Bath.
UC is a huge deal. By 2020, it will be the second largest component of welfare spending – amounting to £53 billion a year – and almost half of all families with children entitled at any given point. Over time it will touch the lives of far more, an experience that could have a significant impact on families’ life chances and ambitions. So it is important to get it right.
Beset with difficulties since its announcement at the start of the last parliament, UC has not just struggled with IT implementation, as Government projects tend to do. It has also faced a battle with the Treasury which, sceptical about the complex scheme from the start, has milked it for savings before it was even in existence.
This came to a head last year when the government announced billions of pounds of cuts to both tax credits and UC. By U-turning on the former but the not the latter, the government is in the unenviable position of rolling out a benefit that will be significantly less generous than its predecessor: £3 billion a year less so by 2020-21. Half a million working families will now be worse off under UC than in the current system.
Despite these difficulties, it’s not hugely surprising that Iain Duncan Smith stuck with the system. After all, UC has been at the heart of his central mission for over a decade. But with a change of personnel at the top and the arrival of the point when the theory of UC meets the reality of benefit claimants’ lives, many have called for his successor, Stephen Crabb, to fold. Yet he has committed to putting UC into place. This is the right move, given the potential UC has to transform lives.
But does that mean the new Work and Pensions Secretary should simply stick with UC as his predecessor left it? No. In order to make a success of it, he must twist and reclaim Universal Credit as a tool for improving living standards, rather than accept its current form as a Treasury-led cost cutting plan.
Much has been made of the reduced generosity of UC. But arguably more important still are the changed incentives to enter work and progress. As designed, UC targets households where nobody works. But the number of such households has already reached a record low. The bulk of remaining workless households include a disabled person, who need more than just financial reward to re-engage. For UC to really boost employment it needs to refocus on those likely to respond to work incentives – single parents and second earners. For the latter earning £5,000 would leave them just £1,750 better off. Such poor returns risk them choosing not to work at all.
Universal Credit also needs to grapple with a major new labour market challenge that no-one would have envisaged when first designed in the late 2000s – the new National Living Wage. This welcome intervention will make a huge difference. Six million workers are expected to benefit by 2020. But it will also lead to pay compression at the bottom of the market, with around three million workers earning around the legal minimum. UC should have a central role in helping workers off the wage floor and out of low pay altogether.
The DWP plans to introduce a system of ‘in-work conditionality’, bringing the kind of activity required of jobseekers into the lives of around a million low paid workers. This is a huge extension of the state’s interaction in the lives of working people. But simply trying to tweak the existing conditionality approach for the out of work is unlikely to be the answer for low earners in work. This untried and untested approach requires a radical rethink. Instead of a limited approach that simply pushes people to increase their hours while remaining on the legal minimum wage it should focus on helping people progress and increase their hourly earnings. This requires a more radical cultural reform in Jobcentres and is likely to involve other specialist agencies, who will have to support many more working claimants.
UC must do more to support its original aim of making work pay and meet the labour market challenges of tomorrow. The Resolution Foundation has set out a three-point plan a three-point plan to do this; rebalancing incentives, ramping up practical support to boost wages, and acting on some of the practical problems that have risen during UC pilots.
This will stack the odds in favour of Universal Credit being a major success. But the extra investment required will make it less of a favourite with the Treasury.