The economics of Universal Credit


How well has Universal Credit met its original objectives?

1.              Intended to mimic earnings and receipt of a monthly salary, Universal Credit integrates payments for adults, housing, children and childcare into a single award assessed and paid in arrears calendar monthly into one nominated bank account per eligible individual or couple. Administered by a single agency, and with a single work allowance and taper, Universal Credit fits into an overarching policy narrative of simplicity and increased work incentives, intended to encourage claimants to enter work, earn more, take personal responsibility for household budgeting and become more self-reliant, as if earning a monthly salary. Emerging findings from our three year, Economic and Social Research Council funded, qualitative, longitudinal, research study entitled ‘Couples balancing money, work and care under the shifting landscape of Universal Credit [1]is showing that, to date, there is little evidence that it is yet achieving these objectives, or is necessarily any better at doing so than the legacy benefits and tax credits it is replacing.


2.              We conducted a first round of in-depth, face to face, individual and joint interviews with 90 participants in four areas in England and Scotland between June 2018 and January 2019. Our first phase report of findings is due to be published in June 2020. A second round of follow-up interviews will be conducted in the late spring/early summer of 2020. The sample comprised claimants with and without dependent children who were (or had recently been) in a couple claiming Universal Credit jointly. Many also had experience of claiming legacy benefits or tax credits as a joint or single claimant. Most participants had been in receipt of Universal Credit for at least a year at the time of the interview.


3.              Several aspects of Universal Credit’s design were found to be undermining the ability of the policy to meet its objectives. The concept of a single monthly payment has been lauded by some commentators. However, as with any single solution, there are trade-offs and compromises. Payment monthly in arrears means that there is a minimum five week wait after claimants are deemed eligible for the benefit before the first payment is made. Even with the offer of an advance loan to tide them over, financial difficulties faced by many claimants during the wait for payment have been well documented, and were also reflected in our own research. Couples with children who received advances at the start of their claim were sometimes unaware that it was a loan that became immediately repayable. Large, automated advance repayments deducted from the Universal Credit payment could reduce household income by significant amounts each month for a year or more.


4.              Deductions for advances were often compounded by further deductions for historical benefit and tax credit overpayments, ‘third party’ deductions for rent and council tax arrears and, in some cases, ‘last resort’ deductions for current rent and energy costs. Some claimants also inherited, and became liable to repay, the historical debts of their partner which, in several cases, related to a period before the couple were living together or had even met.


5.              For couples with insecure work whose wages fluctuated from month to month, increased responsiveness to changes in earnings could also generate significant income volatility and budgeting difficulties. Even participants with fixed salaries paid calendar monthly reported that their Universal Credit payment sometimes fluctuated in unpredictable and seemingly arbitrary ways. Often the volatility was due to the complex ways in which automated earnings data from the HMRC Real Time Information (RTI) system interacted with the Universal Credit fixed monthly assessment period. If wages were paid weekly or four weekly, or early, due to a week-end or bank holiday, for example, in single-earner couples, two, or sometimes three sets of wages could be counted in one monthly assessment period, potentially reducing the Universal Credit payment to zero. In dual earning couples, in which both the partners’ wages were paid with different frequencies or on different days in the month, up to four sets of earnings could be used as the monthly income figure against which their entitlement was assessed. When this happened, even though actually earnings had not increased, the Universal Credit claim could be automatically ended because recorded aggregated earnings exceeded the monthly entitlement threshold. Although such claimants can reapply the following month, the lost entitlement and work allowance from the previous month are non-recoverable.


6.              With childcare contributions included in the monthly assessment and tapered according to earnings, some couples were unable to pay their childcare costs and got into debt with their childcare provider. We found that some mothers had to give up their jobs as a result. Our research is showing that such unintended effects are causing significant budgeting difficulties and financial hardship for some working families, as well as undermining UC’s key policy goal of incentivising work and earning more.


7.              An integrated benefit which includes payments for adults, housing, children and childcare in a single award also carries significant risks, especially when entitlement is paid monthly. Our research found that stopped or reduced payments, due to deductions, administrative errors, underpayments or overpayments, sometimes left unemployed couples who had no other source of income with very little money to live on. For couples with dependent children, Child Benefit was sometimes the only source of income that the family could rely on.


8.              Different elements of Universal Credit also send deeply contradictory messages. The policy emphasises individual responsibility and self-reliance while at the same time potentially placing the entirety of the household income under the control of one individual and obliging one partner in a couple to be financially dependent on the other. Though relatively uncommon in our sample of mainly stable and committed couples, cases of financial abuse or mismanagement of the claim by one partner (the man, in all such cases), had resulted in significant rent arrears and debt for the non-recipient (female) partner. A single payment into one bank account also does nothing to boost the financial capability or economic independence of the non-recipient partner. 

Were the original objectives and assumptions the right ones? How should they change?

9.              Wanting to simplify the benefit system is a laudable policy objective, so too the aim of improving work incentives for people entitled to means-tested working age benefits. However, underpinning these objectives is a series of largely untested assumptions about how claimants would respond to changed assessment and payment arrangements and work incentives. Our research is showing that, although budgeting on a low income was challenging for many claimants, income inadequacy, rather than an inability or failure to manage the household finances effectively, was often the key underlying issue. For both unemployed couples and working families, having different sources and amounts of income coming into the household at different times of the month, as was the case under the legacy system, generally assisted  budgeting and household money management, while allowing each partner in a couple to have an income.


10.          Simplification, moreover, is a matter of perspective. The question that needs to be asked is simple for whom? Administered and paid by a single government department, Universal Credit centralises and automates many of the functions that were previously conducted by different locally-based, public sector agencies and staff. But many of our participants struggled with the telephone help line and digital interface, not because they lacked IT skills or access to a mobile phone or computer, but because of its automated, ‘faceless’ character. Algorithmic decision making meant that contact centre staff were frequently unable to explain to claimants why they had been under or over-paid, or why their payment or entitlement had stopped. Errors and ‘earning disputes’ could take many weeks to be resolved leaving some couples with no option but to take out further borrowings.


11.          Monthly entitlement, which in couples takes into account their aggregated income and earnings, is assessed and calculated separately each month using mainly employer and HMRC-supplied earnings data. The greater visibility between earnings and benefit entitlement is claimed to incentivise work entry and higher earnings, as well as reducing the likelihood of overpayment, fraud and error. However, our findings are showing that a reduction in the amount of Universal Credit paid as earnings rise does not necessarily incentivise paid work or extra hours. Some participants felt that the 63 per cent taper penalised rather than rewarded working and additional hours. Knowing that the Universal Credit payment that their partner received would be reduced if they worked longer hours could also disincentive overtime in some cases. Nor does monthly assessment necessarily increase transparency. The automated process could make the calculation of the award hard for claimants to understand and challenge. Instances of overpayment and underpayment,meantto reduce under Universal Credit, were surprisingly common.


12.          Under Universal Credit, claimants are no longer characterised as being ‘in work’ or ‘out of work’. Rather, they stay on the benefit as their circumstances and earnings change, for as long as they remain eligible. Yet working tax credit was based on a diametrically opposite assumption – that out-of-work and in-work benefits should be separate and be seen to be separate, so as not to stigmatise benefit receipt or deter take-up among people in employment. In our research, many participants said that they found the earnings rules and annual assessment of the legacy system of tax credits easier to understand and manage than monthly assessment. Some working claimants said they found visiting the Jobcentre onerous and demeaning.


13.          Even though some participants may have been financially better off under Universal Credit, the income security of the legacy system often trumped an increase in household income, particularly if the increase was relatively small and extra hours worked meant less time to spend with children.


What effect has fiscal retrenchment had on the ability of Universal Credit to successfully deliver its objectives?

14.          In our research, the wider economic context of austerity, welfare reform and fiscal ‘retrenchment’ - including wage stagnation, increases in the cost of living, social security cuts and the freeze in working age benefits and Child Benefit, the introduction of the two child limit and of the benefit cap – had all had an impact on family income to a lesser or greater extent, depending on the couple’s circumstances. At the same time, the under-occupancy charge, Local Housing Allowance freeze and the abolition of Council Tax Benefit (replaced by council tax support, which varies between local authorities) had increased the amounts many claimants were required to contribute towards rent and council tax, effectively squeezing their disposable income from both ends. This had made household financial management and budgeting that much harder, for claimants both in work and out of work.


Which claimants have benefited most from the Universal Credit reforms and which have lost out?

15.          Government modelling, and the studies of other analysts, generally use benefit entitlement as the basis on which financial gains and losses under Universal Credit for different groups are estimated and compared against the legacy system. However, our research is showing that this may give a distorted picture of winners and losers. The system of deductions, and the way in which monthly assessment interacts with income and earnings, mean that what many claimants receive as payment each month may in actuality be significantly lower than their recorded entitlement. Further research which uses live monthly claim payment data, rather than entitlement, would help to address this shortcoming. 


16.          In our research, all the couples who claimed Universal Credit struggled financially, but some struggled more or less than others, depending on their employment status and the circumstances giving rise to the claim. Those who tended to struggle less were those who moved on to Universal Credit directly from paid work, or who still had an earner in the household. With wages and sometimes small savings to fall back on, such couples were able to avoid taking on a repayable advance at the start of the claim. Because they had no savings and very low incomes, those who struggled most were unemployed couples who moved on to Universal Credit from out-of-work benefits.


17.          Those who benefitted the most financially from Universal Credit appeared to be single-earner couples with dependent children in which the wage earner received a fixed monthly salary which was paid on a date in the month that did not interfere with the couple’s monthly assessment period.


18.          An unexpected finding was that many of those who lost out most were dual-earner couples with children, including those with childcare costs. Even those paid a fixed, monthly salary could lose out financially. This was due to several factors. The single work allowance in families with children meant that the wages of second earners, who were mainly women, were usually tapered from the very first pound of net wages. This also affected second earners under tax credits; but in practice, the generous annual disregard (£25,000 for some time) meant that second earners’ incomes did not reduce the award; and in any case, the reduction in tax credits did not usually happen immediately, whereas it does (and at a higher taper rate) under Universal Credit. As noted previously (paragraph 5), monthly assessment, based couples’ aggregated earnings recorded within a fixed assessment period, could also create income volatility and loss of entitlement, reducing overall household income and presenting claimants with significant budgeting challenges.


19.          Also important to appreciate is that Universal Credit is not just about the amount of money to which an individual or couple may be entitled. Greater compliance costs are also borne by claimants. Self-employed claimants and others paid outside the system of PAYE must self-report their earnings each month. Parents seeking contributions to childcare costs must evidence and reclaim these each month (now with an extra month’s grace). Increased conditionality, particularly for ‘lead carers’ in couples with children, means that many more claimants are subject to work conditionality and required to evidence job search and respond to messages from Work Coaches. Administrative and compliance requirements must largely be met using the online digital platform. Budgeting monthly and managing a fluctuating, sometimes unpredictable, Universal Credit payment also increases the amount of time and effort involved in monitoring household cash flow and engaging with the online account and contact centre. In many of our couples, responsibility for these additional tasks, together with the stress and worry that often accompanied them, fell disproportionately on women. These are perhaps some of the unintended gendered consequences of Universal Credit.

How has the world of work changed since the introduction of Universal Credit?

20.          When Universal Credit was originally conceived around 10 years ago, the world of work and the labour market context were significantly different. At that time, unemployment and ‘intergenerational worklessness’ and the low employment rate of lone parents (compared with partnered mothers) were major policy concerns which preoccupied the politicians and policymakers who were the architects of Universal Credit. Zero hours contracts and the ‘gig economy’ were only just emerging as issues relevant to policy. Now, unemployment is at an historic low and the labour market has also become significantly more ‘flexible’ (or ‘casualised’ and ‘precarious,’ depending on your perspective) with many more self-employed people. The employment of lone parents (the vast majority of whom are women) and partnered mothers is at an historic high. Dual earning in couples has become the norm, not to say an economic necessity for many, increasing the need for more flexible working arrangements and childcare policies which allow two-earner families to better combine paid employment and care. Family life, as well as working life, has changed and issues of financial independence and gender equality are arguably more salient in both.


21.          Record levels of employment in the context of wage stagnation over the past decade mean that there are now more people in poverty in households that have an earner than in those that do not do so, as well as more children living in poverty in working families than in workless ones. These marked changes in the nature of work and the structure of the labour market mean that many of the assumptions and ambitions underpinning Universal Credit’s design no longer hold. The overarching focus on incentivising people to move from out of work benefits into paid work is no longer as relevant or pressing as it was a decade ago. Seeking to address in-work poverty and ensuring that people in low-paid work progress and increase their earnings is consequently much more important than when Universal Credit was first conceived; but it is not clear that the ways to achieve this have yet been developed, and some features of Universal Credit (as noted earlier in this submission) may work against this goal In practice.


If Universal Credit does not adequately reflect the lived experiences of low paid workers, how should it be reformed?

22.               We would argue that it is not just low-paid workers but all types of claimant who could potentially benefit from reforms to Universal Credit. Based on our research, we suggest the following three key areas for the Committee to consider in developing and in assessing reform proposals.


23.               More consideration should be given to the needs and circumstances of couples, with and without dependent children. This would include addressing issues of financial incentives to work for both partners in a couple (for example, individual work allowances), the treatment and payment of childcare care costs, and the options for different payment frequencies and payees (for example more or less frequent payments and separate or split payments in couples). Recognising and supporting people as individuals, partners and parents is challenging, but important if Universal Credit is to better reflect contemporary family life.


24.               Seeking ways to reduce the gap between the amount of Universal Credit that claimants are entitled to and the amount that they actually receive. This would include revisiting the rules regarding deductions (for advances, overpayments, rent arrears and other debts). The impact of deductions should also be taken into account in any modelling or assessment of the adequacy of Universal Credit, the distributional consequences, and the financial impacts.


25.               Seeking ways to enhance the security of Universal Credit, so that people are able to predict their incomes more accurately, in both the short and longer-term. This might include, for example, ensuring on-going income at the start of a claim with a grant rather than a repayable loan, clearer and more timely information and communication about the calculation and assessment of entitlement, together with consideration of a fixed period of award instead of continuous re-assessment on a monthly basis.


27 February 2020



[1] Couples balancing money, work and care under the shifting landscape of Universal Credit, ESRC ES/R004811/1 https://www.bath.ac.uk/projects/couples-balancing-work-money-and-care-exploring-the-shifting-landscape-under-universal-credit/