Written evidence from the Joseph Rowntree Foundation COL0044

Introduction

The Joseph Rowntree Foundation (JRF) is an independent social change organisation working to solve UK poverty. Through research, policy, collaboration, and practical solutions, JRF aims to inspire action and change that will create a prosperous UK without poverty.

Summary of this submission

In this submission, we will be responding to questions 1, 2, 3 and 4 of the Committee’s call for evidence, sharing analysis of Government’s cost of living support package alongside a series of policy recommendations on the cost of living, debt deductions, and the broader social security system.

JRF welcomes the support provided in Government’s recent cost of living support package. Government was right to target the majority of support towards people receiving means-tested benefits, for whom price increases are having severe knock-on impacts on quality of life and finances. We also welcome the acknowledgement of the specific challenges faced Zconsistently eroded in recent decades.

For many households on low incomes, Government’s cost of living announcements will help provide protection against worsening circumstance as costs rise over the coming year. But the cost of living payments are also blunt, and there are some gaps in the coverage of support announced – for example, for unpaid carers and larger families.

Yet whilst these announcements may protect a range of different types of households against worsening costs, they have come in the context of a pandemic which dragged low income households into debt and arrears[1] and in which people receiving benefits then saw a cut to Universal Credit[2] on the eve of the first energy price hike. Prior to the pandemic, many on the lowest incomes were already struggling to afford essentials while relying on a benefits system which had seen its value substantially eroded[3] [4] in recent years. Compounding this, systematic deductions from people’s benefits made at source by DWP further reduce the money people have to live on. As the pandemic hit, 14.5m people were living in poverty and 1.8m children were growing up in very deep poverty – struggling to afford all essentials.

Longer-term, tackling this must be a priority so that events such as this period of high inflation don’t cause such devastating uncertainty and financial hardship. The Government has opted for one-off payments to boost the system substantially in this time of crisis. But a more robust underpinning system would prevent the need for this in the first place, providing households with consistently sufficient support, and avoiding the gaps and policy challenges caused by one-off and temporary measures. In the longer term, Government must commit to a social security system in which people are adequately protected against income shocks and times of hardship; at the very minimum, this must be a system which always enables people to afford the essentials.

In this submission, we also make the following key recommendations – Government should:

• Immediately stop deducting debt repayments from benefits at unaffordable rates, which is cutting support for households too far below entitlements. This means:

• Capping total deductions to repay Central Government debts (DWP/HMRC) at 5% of the Standard Allowance (in line with the standard percentage deduction for most other creditors)
• Introducing an overall cap on the total of all deductions of 15% of the Standard Allowance (down from current 25%) (this would be the maximum imposed deductions – with flexibility for claimants).

• Commit to a much shorter timeframe for annual uprating between measuring inflation and uprating accordingly, to ensure benefit uprating genuinely reflects inflation for the year in question.

• Write off tax credit debt for those on the lowest incomes, and reform the five week wait and Advance payments, to prevent people from being pulled into debt at the start of their Universal Credit claim

• Consider providing additional support for unpaid carers, to ensure carers across the UK are properly protected from the pressures of the cost of living alongside other groups on low incomes. 

Responding to the call for evidence

1. How effectively will the new Cost of Living Payments protect different types of households from increases in the cost of living? 

Government is right to target households on the lowest incomes

On the eve of the Government’s Cost of Living announcements, support for people on the lowest incomes was urgently needed[5]. Households had been battered by the economic storms of a pandemic and were facing a growing cost of living crisis, with many on the lowest incomes already struggling to afford essentials while relying on a benefits system which had seen its value substantially eroded[6] [7] in recent years.

Government was right to target the majority of the Cost of Living support package towards people receiving means-tested benefits, for whom price increases are having severe knock-on impacts on quality of life and finances. The Chancellor’s announcement has provided much-needed support for households, which will protect many of them against rising costs over the coming year. 

The Chancellor was also right to specifically acknowledge the challenges facing both the unemployed and those unable to work; these are groups for whom support has been consistently eroded in recent decades. Combined with the significantly higher likelihood that these groups are in destitution and deep poverty, it was a matter of urgency that the Chancellor acknowledge and harness the powerful role which the social security system can play in directing support quickly and efficiently to those who need it most.

Analysis shows measures will protect many against worsening circumstances

For many households on low incomes, Government’s Cost of Living announcements will help provide protection against worsening circumstance as costs rise over the coming year. Analysis from the Resolution Foundation[8] shows that the measures announced (including the broader and earlier measures of £400 Energy Support Scheme, £150 Council Tax Rebate, National Insurance Contribution threshold rise and fuel duty cut, in addition to the Cost of Living Payments to households on means-tested benefits) will offset 82% of the rise in household energy costs in 2022-23, rising to 93% for those in the bottom 3 deciles. Their calculations also show that the one-off payments announced are £1bn more generous than bringing forward the projected 9.5% benefit uprating from April 2023 to October 2022 would have been.

However, there are still gaps in the coverage of support announced

However, as Resolution Foundation also outlined in their analysis[9], these payments are blunt, and the flat rates of support don’t always respond to people’s individual circumstances: for example, for households of working age who receive means-tested benefits, those with three or more children will see energy bills increasing by £500-plus a year more than those without children but will receive the same flat payment.

And people who start to claim Universal Credit after the payment cut-off date (or move off UC before the payment) will receive no support; the former group in particular will miss out on support due to it being a one-off payment but would have received support if Government had opted for a percentage increase to benefits instead. This gap is of particular concern, given the forecast worsening economic outlook and job losses over the winter and into the beginning of next year[10]

For many, additional payments risk being eaten up by debt and arrears

However, whilst these announcements may protect a range of different types of households against worsening costs, they have come in the context of a pandemic which dragged low income households into debt and arrears[11] and in which people receiving benefits then saw a cut to Universal Credit[12] on the eve of the first energy price hike.

JRF polling of 4,193 adults in low income households, published in October 2021, showed 3.8 million low-income households across the UK were in arrears, and 4.4 million had to take on new or increased borrowing through the pandemic[13]. JRF polling of 4,046 adults in low income households in May 2022, due to be released in June 2022, shows an even more worrying picture of growing debt and arrears for households on the lowest incomes[14].

Whilst the announced Cost of Living Payments may in theory balance out rising costs on average, in practice for many people these payments will disappear into a financial black hole that has already opened up – one of growing debt and arrears, in the broader context of eroding benefit levels. And not only are the basic rate of benefits too low, but systematic deductions further reduce the adequacy of benefits and any subsequent increases: for more detail on debt deductions, please see our response to question four below.

The scale of the support targeted also means that while, at best, it will prevent hardship from worsening for some households, it won’t prevent the ongoing financial hardship which many households are experiencing. As the pandemic hit, 14.5m people were living in poverty and 1.8m children were growing up in very deep poverty – struggling to afford all essentials. While this support package will prevent this from getting worse for some, there remains a significant issue of persistent high levels of poverty in the UK. And for many, this will be accompanied by a growing burden of debt and arrears.

Longer-term, tackling this must be a priority so that events such as this period of high inflation don’t cause such devastating uncertainty and financial hardship. The Government has opted for one-off payments to boost the system substantially in this time of crisis. But a more robust underpinning system would prevent the need for this in the first place, providing households with consistently sufficient support, and avoiding the gaps and policy challenges caused by one-off and temporary measures. In the longer term, Government must commit to a social security system in which people are adequately protected against income shocks and times of hardship; at the very minimum, this must be a system which always enables people to afford the essentials.

2. What approach should the Government take to the uprating of benefits and state pensions in future years?

The Chancellor’s commitment to uprate benefits with September 2022 inflation next April, announced as part of the Cost of Living package, is welcome - though ultimately this should be considered normal policy action rather than an exceptional measure. In more normal years with more stable inflation, this typical uprating approach - of uprating in Spring according to the previous Autumn’s inflation – has tended to be a reasonably acceptable approximation to keeping rises in benefits aligned to rises in prices. This year however was exceptional, and the usual approach was not sufficiently responsive to the extraordinary rise in inflation.

Analysis from JRF of benefit uprating processes since 1972 shows that the uprating for 2022 had the biggest fall in the real value of the basic rate of unemployment benefits in 50 years[15]. Whilst this year’s particularly striking situation was the result of the exceptionally large rise in inflation between September 2021 and April 2022, eight of the ten April upratings between 2013 and 2022 saw the basic rate of benefits lose value in real terms, meaning this year’s extraordinary rise in inflation should also be placed in the context of a gradual erosion in real terms of the basic rate of benefits largely resulting from policy choices (uprating freezes and caps), to the current point of inadequacy. 

In future, we recommend that Government uses a much more up to date inflation measure to calculate uprating each year, to ensure there is significantly less time between the CPI measure and subsequent uprating. Whilst this shorter implementation period may have been more challenging to implement for legacy benefits, it should be feasible to implement within Universal Credit given the new system’s responsiveness. In theory, the responsiveness of Universal Credit could also lend itself to more regular uprating in the future to ensure benefit payment levels rise with prices throughout the year (this would be particularly helpful for claimants during periods of high inflation); for example, monthly adjustments could, in theory, be possible. For the present, Government should commit to a much shorter timeframe for annual uprating between measuring inflation and uprating accordingly, to ensure benefit uprating genuinely reflects inflation for the year in question.

3. Following the Chancellor’s announcement on 26 May, are there other ways in which the Government should increase support for people on legacy benefits and state pensions ahead of the next scheduled benefit uprating in Spring 2023?

Whilst the Chancellor’s recent support package provided targeted support for a range of groups, there are still some who are particularly vulnerable to the rising cost of living but have missed out on targeted support. One key group who has lost out are unpaid carers, who did not receive a specific payment in the Chancellor’s announcement, for example in the form of a top-up to Carer’s Allowance, despite evidence suggesting they are likely to face higher costs as a result of their caring responsibilities[16].

Whilst Carers UK estimates that unpaid carers across the UK provide care worth £132bn a year[17], more than a million unpaid carers are living in poverty, of which more than half are women. Government should consider providing additional support for unpaid carers, to ensure carers across the UK are properly protected from the pressures of the cost of living alongside other groups on low incomes. 

4. What changes should DWP make to their deductions policies and practices to protect those on Universal Credit and legacy benefits from reduced incomes?

Unaffordable debt deductions are causing material hardship

The erosion of benefit values in recent years means that for too many people the basic rate of benefits does not cover the cost of essentials. Compounding this, systematic deductions from people’s benefits made at source by DWP further reduce the money people have to live on.

It’s not right that households already struggling to make ends meet are having their benefit incomes further reduced via unaffordable debt repayments to Government and other third parties.  These repayments, capped at unaffordably high levels, are directly impacting people’s ability to afford the most basic essentials: JRF’s destitution research highlights debt deductions as a key factor in destitution[18] and data from Trussell Trust[19] shows the link to food bank use, whilst research from StepChange[20] and JRF’s own polling of claimants due to be published at the end of June (see below) shows the significant hardship associated with debt deductions.

Recent Parliamentary Questions (PQs) from Stephen Crabb MP show the scale of deductions, and their impact on families[21]. Data shows that for households claiming Universal Credit:

• While the average deduction has previously been reported as 15% of the standard allowance[22] (which would work out as around £50 p/m for a single person or £79 p/m for a couple, assuming the claimants are aged 25 or over), the most recent PQs reveals that the distribution is significantly skewed, with almost half (47%) of households with a deduction having over 20% of their standard allowance deducted. This is in the context of the deductions cap currently being set at 25%, though deductions of above 25% are allowed in some cases.

• Families with children are more likely to experience deductions (51% of families with children vs 40% of families without children), as are families where someone has been assessed as being unable to work due to illness or disability (53% of families where someone has limited capability for work or work-related activity vs 41% of other families).

• Families with children also tend to experience larger deduction amounts (62% of families with children with a deduction are having over 20% of the standard allowance deducted vs only 32% of families without children). This means 66% of households experiencing this highest deduction rate are families with children (even though only 44% of households on UC have children).

In May 2022, JRF undertook a survey of 4,046 people on low incomes to understand their experiences of debt, arrears, and the rising cost of living. Our survey results, due to be published in June 2022, demonstrate a clear and worrying link between debt deductions from Universal Credit and material hardship, with the vast majority of people having deductions taken from their Universal Credit payments reporting experiencing one or more forms of material deprivation and more likely to be experiencing material deprivation than claimants without deductions[23]. Material deprivation in this context refers to things including but not limited to: not having been able to keep your home warm; not having been able to adequately furnish your home; not having had essential dental treatment done; not being able to replace or repair major electrical goods; having gone without basic toiletries; having gone without a shower or bath; or not dressing appropriately for the weather. We can share more findings with the Committee upon publication later in June 2022.

Of the total £124 million deducted from UC payments in November 2021, £106 million related to central government debts.[24] With the majority of debt deductions from Universal Credit currently going towards repaying debts owed to Government, this makes it an obvious area for urgent policy action. 

Government must make changes to the debt deduction caps within Universal Credit

Currently, the cap for debt deductions is set too high, allowing too high a percentage of people’s standard allowance to be deducted. Government must ensure that deductions don’t pull people into poverty or prevent them from affording the essentials.

When households do accrue arrears owed to the state, Government should ensure state debt collection processes model best practice around fairness and affordability. DWP should embed proper affordability assessments for individual claimants before making debt deductions. But as an affordability safety valve, Government must:

• Immediately stop deducting debt repayments from benefits at unaffordable rates, which is cutting support for households too far below entitlements. This means:

• Capping total deductions to repay Central Government debts (DWP/HMRC) at 5% of the Standard Allowance (in line with the standard percentage deduction for most other creditors)

• Introducing an overall cap on the total of all deductions of 15% of the Standard Allowance (down from current 25%) (this would be the maximum imposed deductions – with flexibility for claimants).

Reducing the maximum cap on deductions from 25% to 15% would make a significant difference to households on the lowest incomes; CPAG estimates that lowering the maximum deduction rate to 15% would provide up to £53 more a month for a couple and up to £33 more a month for a lone parent[25].

Government should write off tax credit debt for people on the lowest incomes

As part of addressing unaffordable debt deductions, Government should also look to address the burden of historic tax credit debt on people on the lowest incomes. Evidence shows deductions from UC for tax credit overpayments are causing significant hardship[26], and many people are not even aware they have historic tax credit debts[27] - until they transfer to UC and deductions begin. This can add to an already unmanageable debt burden for many, with historical debts which may have gone unpursued suddenly being automatically deducted from your UC claim. 

The Government estimates some £5.4 billion of tax credit overpayment debt either has or is due to be transferred to DWP from HMRC to be collected as people move onto UC[28]. Much of this debt is historical: data from 2019 shows that 68% of the debt is from before 2016, 16% from before 2011[29]. The overall debt owed is likely to grow further: as of April 2021, 1.9 million families were still claiming working or child tax credits[30].

To address this debt burden for those on the lowest incomes, Government should:

• Fully write off tax credit debt for people transferring to UC, putting an end to new UC claimants being hit with historic debt repayments.
• In combination with this, to prevent further debts from accruing while the transition from Tax Credits to UC completes, significantly increase the generosity of the income disregard again, to ensure current Tax Credit claimants are less likely to accrue debt.
• For existing Tax Credit claimants, write off historic tax credit debts which have not been pursued for six years, in line with the general limitation period applying to other debts, and fully write off debts created as a result of administrative error on behalf of DWP or HMRC.

Please see our 2021 report on household debt for more detail on these recommendations[31].

Government should reform the five week wait and Advance payments

To address a root cause of debt deductions, Government should also reform the five week wait and Advance payment for people applying to Universal Credit. Data shows that repayment of advances are a significant driver of the debt deductions for households on Universal Credit, with repayments of advances making up almost half of the money deducted from UC claimants in aggregate.[32]

Previous Government responses to this structural problem has been to say that it is inherent in the design of UC, which is based on monthly payment in arrears. However, where advance payment debts are taken out by so many claimants, they are demonstrably an institutionalised and widespread part of the system – meaning they must – and can – be addressed. While there are technical and financial issues to work through, we suggest three potential options:

1. Offering a full, non-repayable, payment to all claimants based on an estimated award and subject to their identity being verified. Unlike the current advance, this would be non-repayable. For anyone whose claim is refused, this initial payment could be treated as an overpayment from the state, to be paid back.
2. Making this initial advance payment non-refundable for those who can demonstrate they have no other source of income or face other particularly high risks of hardship.
3. Changing the process for Advance repayments: the Government could only require repayment of advances once a household earns enough to no longer receive Universal Credit.

Please see our 2021 report on household debt for more detail on these recommendations[33].

JRF is due to publish our latest polling on the cost of living in June 2022

In May 2022, JRF undertook a survey of 4,046 people on low incomes to understand their experiences of debt, arrears, and the rising cost of living. We will be publishing this in June 2022 when we will be able to share our findings in full with the Committee.

June 2022