DR E. PIMENTEL DE ÇETIN – WRITTEN EVIDENCE (EUC0068)
 

The economics of Universal Credit

Introduction

Universal Credit (UC) is the most ambitious welfare reform policy since the formation of the welfare state. In January 2006, a green paper by the Department for Work and Pensions (DWP) suggested a ‘single system of benefits for all people of working age’ would have the advantages of simplifying redistributive welfare payments to better meet the needs of people in work, and provide a comprehensive safety net for those out of work. UC strategies seek to create incentives to encourage employment activity, and financial independence.

The mechanics, logistics, advantages and challenges were widely considered before the programme was formally rolled out in 2010, the start of what has now been a decade of austerity. Despite cross-party and inter-agency engagement, collaboration and support – all of which underpin Government’s commitment to social welfare – rolling out UC and systematising its implementation have been marred by operational issues, institutional setbacks, and a general sense of mistrust by claimants fearing being left without dependable means of support.

The source of the systemic imbalance UV tries to redress, with respect to poverty, socio-economic inequality, stable employment, and other factors which would, in fact, encourage financial independence, cannot be isolated from the wider, and more complex economic contradictions in which the UC is situated. Therefore, it is not yet possible to qualify the success, or failure, of UC using purely economic data, growth differentials or labour market statistics. Some of these data sets are robust, from an economic growth perspective, yet disguise staggering levels of income inequity and poverty that plague a measurable demographic, especially the elderly, and especially children. Whilst it would be short-sighted to qualify UC as a failure, it does bear noting that its ultimate success would be signalled in the sustained levelling-up of individuals and households that are on, or fall below, the poverty line.

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

At the most fundamental level, UC’s bold and radical raison d’être belies the true complexity of the systems it seeks to replace. UC came about as a functional, and largely technocratic, concern for the management of benefits and tax credits, that would deliver income support promptly and reliably. Simplification, however, does not account for the contingencies of why people claim benefits.

With significant cuts in public sector spending over the period UC has been semi-operational, it is all too tempting to overlook Government’s commitment to redistributive efforts, which amount to 40% of GDP.  In 2019, £850 billion was allocated to public services, social security payments and capital investments. Yet, this level of investment runs counterfactual to the realities that see low-income households budgeting ‘pennies’ and earmarking irregular income streams to offset the cost of living.

Public Expenditure Statistical Analyses (PESA) for 2018[1]

The biggest driver of poverty is not a lack of material possessions[2]. It is the inability to cultivate human capital and strengthen systems of social provisioning and social cohesion which develop the resilience of societies to cope in times of stress[3]. Lack of inclusive economic participation, limited scopes for livelihoods, job insecurity and low wages result in poverty. Consider other intangible goods which may help lift an individual out of poverty: education, and access to health, care and information all enable resilience with which to weather periods of economic volatility, market failures and political uncertainty. From this perspective, UC is only a normative element of policy reform and not yet an effective mechanism for social welfare or economic justice.

The demand for public policy, that is sensitive to these intersectional dynamics, is, unfortunately never optimal. There are several reasons for this, but foremost is that Government policy is rarely set out as ‘a clear strategy for what they want the system to achieve’[4] thus forestalling public scrutiny – or evaluation – into the fairness, or viability of the proposed programme.

Reversing nearly 10 years of austerity in a climate of economic uncertainty marked by low wages, rising rents and cost of living and significant cuts to social security, the long-term view is that a reduction for income inequality depends on the ability of Government to raise public monies with which to fund public services, in conjunction with the benefits system. To separate one from the other would potentially distort policy outcomes because individuals, households, communities and businesses are exposed to economic and political changes at different stages over the time they contribute to, and benefit, from the system.

Simply put, without money to support UC, in terms of resources, technical expertise and case handling, and without an understanding of the dynamics of poverty within this ostensibly prosperous economy, it is difficult to set the system on the path of its original purpose.

The new year has already witnessed delays to the  full roll-out of UC, with much of the current evidence as published by the Institute for Fiscal Studies[5] and the Institute for Government[6], contextualising the business case summaries published by the Department for Work and Pensions since 2018[7], to better reflect the complexity and scope of the socio-economic, cultural and psychological consequences of such a large-scale welfare reform on individuals and households[8].

2. What have been the positive and negative economic effects of Universal Credit?

UC introduced features that differed from previous benefit schemes: fully digitised service, largely unavailable to households without Internet data or computer access; paying monthly, in arrears, rather than prospectively, a feature which impacts directly on the saving and budgeting strategies of claimants, who are paid either weekly, or fortnightly, or on those with precarious job situations; increased conditionality; and reduced amounts paid to some claimant groups, the logic and logistics of which have proven to be cumbersome to untangle[9].

The cultural shift introduced by UC contrasted hugely with rules that in almost all cases dis-incentivised working below a certain amount of hours weekly. Under UC, in theory, any amount of work would pay as long as the claimant had an ‘interest’ in doing more work or earning more. This flawed assumption is behind the introduction of the claimant commitment, which requires an individual to spend up to 35 hours a week looking for work, or face more stringent sanctions.

This conditionality fails to take into account the various factors that keep people formally unemployed in the first place, such as care duties and work in the home. The role of the state is fundamentally recast: the state and the taxpayer now have an interest in requiring those in less than full-time employment to do more work, or earn more, in order to manage the overall burden of benefits and reform on the public purse, not simply to establish a more equitable system of income redistribution.[10]. In-work conditionality assumes people have choices: in working more hours; in job opportunities; for employment security; or in earning higher wages. Situations where claimants who lose out on benefits if they are judged to be earning less than they could, or are seen to be making less than a ‘reasonable effort’ to work, are one of the most intractable paradoxes of UC.

UC is meant to encourage independence through higher earnings and less reliance on benefits, but this conditionality is dependent upon the health of the labour market – which incidentally ignores the value of care work to the economy[11]  - and qualifies human activity hierarchically, on the basis of value and productivity, without the full weight of how biases bear upon auxiliary assumptions and their applications in policy prescriptions. It is also dependent upon the provision, quality and sustainability of public goods, such as health, education, transport, police, early years education and provision for elderly care. UC, by and large, has bred mistrust in the state system[12], in large part due to a critical blindness to the complexity of living in favour of transactional simplicity.

One of UC’s greatest strengths is its apolitical ideology (narrow assumptions notwithstanding) at the level of principle, and the cross-party effort dedicated to its implementation. Conversely, its greatest weakness is being removed from the economic reality of its target demographic, and the human cost to living through a protracted period of fiscal retrenchment.

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

Austerity measures have decimated public services, which has led to increased levels of poverty[13]. Yet, Gross Domestic Product per capita in 2019 rose by 6.5% to US$42,580, making the UK the fifth largest economy in the world in terms of GDP[14]. The unemployment rate is the lowest in 40 years, and there are 3.3 million more people in work than in 2010. This is partly due to growth in the workforce over time, and only because 2010 represented a low point following the global recession[15].

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

The table below shows the quarterly rate of growth in employment from 2014.[16] At the start of 2014, only 5,000 cases are on UC. The original target had been set to 1 million claimants.

It is to be noted, 79% of the jobs that have been created since 2010 are full-time, and hence out of reach of full-time carers, in the absence of Government-funded provisions for early-years childcare, or elderly care. Full-time employment, however, is no guarantee against in-work poverty, which is a major and growing problem in this country. In fact, in-work poverty[17] rates outstripped the growth in employment in 2018. Real regular pay and real total pay registered at 0.2% lower than the downturn peak reached in February-April 2008 during the financial crisis. It is also evident that robust economic figures do not reflect reality[18].

5. Does Universal Credit’s design adequately reflect the reality of low-paid work?

In the world of work, high participation tax rates, and marginal tax rates for those in low-paid work are disincentives to start work in the first place. This is compounded by uncertainty in the workplace, care duties and work within the home.

Job Losses as Reported in the Press

Employment figures ought to be further qualified by the massive lay-offs across key industries, and by the closure of long-standing institutions that have, historically, provided some measure of job security. The prevalence of zero-contract hours, flexi-working and occasional employment which increasingly characterise the working lives of those struggling to make ends meet, are not safeguards against poverty.

Conclusion

Support for such large-scale welfare reform cannot be given reluctantly or half-heartedly, nor can it be subjected to political manoeuvring, or indiscriminate criticism. It requires concerted effort from all those involved in order to keep UC thriving and true to purpose. It also requires funding, and lack of public monies, despite Government commitment to social welfare, is the thorniest structural hurdle to the full implementation of UC.

Since 2010, and running parallel to austerity measures, the tax system in the United Kingdom has been undergoing piecemeal reform shifts with various degrees of success[19], and a lot of distortion. Government’s social welfare plans do not, currently, include a rise in the tax margin, or new taxes. While there is historical, and world-wide evidence to support the claim that high taxes do not discourage work, or initiative, or hinder economic growth[20], there is also evidence to suggest an increase in tax is unlikely to mean more money for Government to redistribute[21].

Economists, for example, consider the progressivity of the tax and benefits system and judge policy on the basis of redistribution. Government finds itself in a predicament. One of the most pressing concerns are the moderate levels of intake of tax compared to rising public spending pressures. However, without raising taxes or increasing levels of borrowing, already at 80.6% of GDP[22], the provision of public services will be further curtailed, and the success of UC could be jeopardised.

29 February 2020