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Ten things you need to know about the welfare White Paper

12 November 2010

11:04 AM

12 November 2010

11:04 AM

I’ve sifted through yesterday’s welfare White Paper, and thought CoffeeHousers might appreciate a ten-point guide to its contents. This is by no means the entire picture
– and some of it will be familiar from past Coffee House posts – but hopefully it should capture the broad sweep of IDS’s reforms:

1) The problem. Fundamentally, the issue is that there are a lot of people stuck on out-of-work benefits: around 5 million at the last count. This means different things for
different groups. For the Treasury and taxpayers it contributes towards an unwieldy working-age welfare budget that has increased by 45 percent, in real terms, over the past decade – to
around £80 billion. For Downing Street’s strategists it throws up all sorts tricky questions about fairness, immigration and jobs. And for the benefit claimants themselves it can result in
lives stripped of opportunity, achievement and wealth. Some 1.4 million of the 5 million have been on benefits for 9 out of the past 10 years. Over the same period, the number of families in severe
poverty has increased.

Iain Duncan Smith’s main explanation for this is that the system has incentivised people to remain on benefits, rather than finding work. The proliferation and growth of out-of-work benefits has
made some claimants better off than they would be in a low-earning job. Even where they might be better off in work – and that actually applies in most cases – the Byzantine complexity
of the benefits system certainly doesn’t make this obvious. It all comes down to what’s called the Marginal Deduction Rate: the rate at which benefits are withdrawn and taxes imposed as a claimant
enters work. For some, as David Cameron highlighted in his 2009 conference speech, this can hit
96 percent – meaning they effectively lose 96p of every extra pound earned; a massive disincentive. Here’s the relevant graph from the White Paper:



2) The solution, aka the Universal Credit.
The central idea of the welfare White Paper is, of course, the Universal Credit. This means replacing a bunch of existing out-of-work benefits
(Income Support, income-based Jobseeker’s Allowance, income-related Employment and Support Allowance, Housing Benefit, Child Tax Credit and Working Tax Credit) with a single overarching
"credit". This credit can then be deducted or increased, as necessary, as a claimant enters or recedes from work.

The beauty of this is its simplicity. Reducing the number of benefits not only reduces the confusion for claimants, but it also smoothes out the disincentives against working. No longer would
someone entering work face extreme Marginal Deduction Rates, as different benefits are withdrawn at different junctures. Instead, the Universal Credit would be withdrawn at a steady rate of 65
percent. As the White Paper explains, this would mean that "the highest Marginal Deduction Rate for low-earning workers would be reduced from around 96 per cent to 65 per cent for those
earning below the personal tax threshold, and to around 76 per cent for basic rate taxpayers." Here’s a graph showing what would happen for that lone parent with two children highlighted above
(as you’ll see, the basic objective is "making work pay"):    

3) Will there be losers? One of the sticking points with the Universal Credit – as it was originally described in the Centre for Social Justice report Dynamic Benefits – was that two groups would "lose a small amount" because of
the reform. The idea of creating losers is anathema to many politicians, as James Purnell suggested in his recent account of trying to persuade Gordon Brown to reform benefits.  


The White Paper appears to go out of its way to avoid this problem. One passages relates that:

"No-one will experience a reduction in the benefit they are receiving as a result of the introduction of Universal Credit. At the point of transition onto the new system, those
households whose circumstances remain unchanged and who would otherwise experience a reduction in income will receive cash protection."

However, as Alex Barker explains over at the FT, there’s a caveat. While no-one will
lose out at the "point of transition" onto Universal Benefit, there could be a long-term effect whereby, as the White Paper puts it, "some households will be entitled to less under
Universal Credit than they would have been had the current benefits and tax credits system continued." The coalition is being open about this, and has even provided us with a graph showing the
winners and losers:

 

Incidentally, this is – by any IFS style account – a "progressive" distribution.

4) Simplicity means improved take-up. The benefits and tax credits that will fall under the banner of the Universal Credit are currently administered by the separate bureaucracies:
the Department for Work and Pensions, the Treasury and HM Revenue & Customs. The Universal Credit will bring them all under the control of the DWP. Not only does this simplify the process in
Whitehall, but it also reduces the number of forms and agencies that claimants have to deal with. At the same time, the DWP will move develop "full online services" for claimants,
including a new online account "through which they will be able to access information about their claim and Universal Credit payments". It is hoped that this friendlier, more intuitive
system will improve the take-up of benefits, and clarify the incentives to work.

5) Conditionality and sanctions. The government is already strengthening the conditionality and sanctions system for the current benefits system (albeit by longstanding principles which are easier said than abided by), and much of this will carry across
to the Universal Credit. There will be four levels of conditionality under the Universal Credit: from full conditionality ("recipients in this group will be subject to the same requirements to
actively seek work and to be available for work as they would under Jobseeker’s Allowance) to no conditionality (for claimants who have a "serious health condition which prevents from
working and preparing for work," etc.). The sanctions that will be imposed on those who fail to meet their obligations are suggested by this table:


6) Costs and savings. The Spending Review set aside £2 billion to implement the Universal Credit in this Parliament. In return, claims the White Paper, the
new system will "reduce losses from fraud, error and overpayments by more than £1 billion per year in the long term". Central administration costs would also be reduced by
"more than £0.5 billion a year". There is no estimate given for how much will be saved on the actual benefits bill, as people return to work.

7) Timeline. The White Paper puts it like this:

"The Government intends to introduce a Welfare Reform Bill in January 2011 to give effect to these changes. We will then adopt a phased approach to the introduction of Universal Credit
with the first individuals expected to enter the new system from 2013, followed by the gradual closure of existing benefits and Tax Credits claims and their transfer to the new system."

The table they provide suggests that the move to Universal Credit will be complete by October 2017:

8) The outcome. The White Paper pins some numbers on what it hopes will be achieved with the Universal Credit. Here’s the key passage:

"The Universal Credits scheme is a cost-effective way of greatly increasing household employment and tackling poverty and child poverty. A total of 4.9 million households with
low-earning workers would see their incomes rise by an average of £1,000 per year. By careful design we can minimise the number of low earners who lose out. 600,000 previously workless
households would enter employment, and the national income (GDP) would increase by £4.7 billion. Consequently, 829,000 households – including 210,000 children – would move above
the poverty threshold."

Although, as I’ve suggested before, it might be difficult to
determine whether some of these successes are a direct result of the Universal Credit, or because of general improvement across the economic landscape.

9) Delivery. Yesterday, the Times reported (£) that the introduction of the Universal Credit
could be scuppered by the wait for a new Treasury computer system, expected in April 2014. Department of Work and Pensions officials tell me, though, that this shouldn’t be a problem – as the
Universal Credit doesn’t require the full computer system at first; it only requires the PAYE details that employers should have sent to the Treasury, in preparation for the new system, some time
before. It will still be worth keeping a sceptical eye on the new computer systems at both the Treasury and the DWP, though. Whitehall doesn’t have a great track record when it comes to delivering
IT projects on time and on budget.

10) Going further? The obvious candidate for change is the withdrawal rate of the Universal Credit. The White Paper says that a rate of 65 percent "would deliver sufficient
work incentives whilst also being affordable" – but a lower withdrawal rate would further improve the incentives to work. The original Centre for Social Justice report proposed a 55
percent rate, which would cost around £1 billion extra. Something, perhaps, for George Osborne to consider should any cash flow unexpectedly into the coffers around the next election.


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