How would you reform Universal Credit for a recovery from Covid-19?

Author(s): Paul Hackett; Karl Handscomb; Dean Hochlaf; Gavin Rice

March 2, 2021

Ahead of the Spring Budget we look at how Universal Credit could be reformed in the recovery from Covid-19.

For Universal Credit to provide an adequate safety net it must be properly funded

By Paul Hackett (The Smith Institute)

If Universal Credit is to provide an adequate safety net it must be properly funded. Making the £20 uplift permanent would be a start. But, alongside extra funding reforms are needed to the way the system is designed.

Work by the Smith Institute with social landlords has highlighted the financial and emotional distress facing tenants moving onto UC. Our analysis of rent accounts consistently shows significant spikes in arrears during the first weeks of a UC claim. Compared with the legacy system, arrears under UC remained high and were not paid down.

Changes can be made at minimal costs and little effort. Direct payment to landlords, for instance, was shown to stop arrears amassing and should be the default (with the choice to opt-out). Reducing the five-week wait when arrears rapidly accumulate would also help immeasurably. Ministers claim payment timeliness improved during the pandemic, but more can be done.

The impact of UC design faults on tenants in the expanded private rented sector (PRS) is a major concern, partly because rents are much higher. The root solution here lies in building more low-cost social homes, which provide greater security, wider welfare support and – over the longer term – savings for the taxpayer. If we continue to push struggling tenants into the PRS housing poverty will increase and the benefit bill will carrying on rising.

UC reform is not a panacea to a frayed welfare system. However, as we seek to build back better, a properly funded and reformed UC system is a must.

The government should make the £20 per week permanent

By Karl Handscomb (Resolution Foundation)

Universal Credit is now the safety net for working-age families. Faced with unemployment or illness that prevents people from earning a living, it is UC that will provide income to pay for basic essentials: food, housing, electricity and more.

But, the Covid-19 crisis has highlighted concerning gaps in support. UC provides an average income replacement rate of 53 per cent for someone who loses their job, but this falls to less than 30 per cent for a single adult. These poor replacement rates are the result of an ongoing weakening of our social safety net, particularly over the last decade, through policies such as the benefit freeze.

The cumulative effect of this weaker safety net means that in the current crisis, 45 per cent of new UC families have seen income falls of more than 25 per cent, three-in-ten have seen their debts increase, and three-in-five say they will struggle to pay their bills going forward. Recently published statistics show part of the problem: almost half of UC families living in privately rented accommodation do not have all their housing costs covered by the housing allowance, and have to make up the shortfall through other means.

When such large holes in the safety net appear, we should mend them. Otherwise we risk exacerbating the hardship that comes with unemployment.

A six-month extension to the £20 per week UC boost falls short of fixing the safety net – the Government really ought to make it permanent.

Towards a minimum living standard

By Dean Hochlaf (IPPR)

There’s a glaring omission at the heart of the current debate on whether to retain the temporary increase in the Universal Credit standard allowance – the reasons it was introduced in the first place. Following a five-year period of frozen benefits, the real term value of Universal Credit fell, plunging many who rely on the safety net into poverty. The road to economic recovery following the Covid-19 pandemic is long and it is imperative we do not strip back the support we provide to the most vulnerable.

There is also an opportunity now to re-imagine the purpose of our welfare system. To do this, we need to develop a more objective assessment of what the appropriate level of benefits should be. Such a metric should reflect the ultimate aim of the welfare state, which should be to prevent people from falling into destitution.

To this end, we should tie our benefit system more closely to the Minimum Income Standard (MIS). The MIS is an estimate of the amount of money different families need to participate in society and enjoy the most fundamental benefits of life. This is a far better reflection of what people need to live than the arbitrary amount currently provided by Universal Credit.

A Minimum Income Commission should be established to review the base line of benefits and to ensure that they are set at a level which complements earnings and additional benefits, so that every family can enjoy a minimum living standard. This would allow the welfare system to effectively tackle poverty and expand economic security for all.

The government should roll out Universal Support to provide wrap-around support for those most at risk of long-term unemployment

By Gavin Rice (Centre for Social Justice)

A key decision taken by the Treasury has been to increase the basic rate of UC by £20 per week. This is not the most efficiently targeted way to spend the money, since it applies to every recipient regardless of circumstance, but the increase is not as severely unaffordable as claimed. First, the cited £6.6 billion cost is overblown, assuming no improvement in the labour market or reductions in claims for UC (the caseload has doubled to 5.9 million since January 2020). As the recovery starts to build momentum and UC cases go down, the cost of keeping the lift would be much lower. It only partially undoes the cuts of the Cameron-Osborne years, and represents the first real terms increase to benefits for single claimants without children for over 50 years.

Still, these funds could be reinvested elsewhere. The taper rate of UC is still too high, at an average of 63p in the pound. This should be cut to 55p. Moreover, support should prioritise families with children. UC looks at households in the round, providing the data necessary to identify which have the most need. There is a strong case for targeting spending in a way that helps families meet the costs of childcare and housing in a dire jobs market.

Most importantly, the government should roll out Universal Support, a system piloted in 2014 which provides wrap-around direction and support to those most at risk of falling into long-term unemployment.

Each individual is assigned to a local authority commissioned Key Worker to create a bespoke support plan engaging the local third sector to help individuals overcome complex obstacles including addiction, indebtedness and mental health problems. Individuals can be referred from any contact point, whether their GP, the Job Centre Plus or Citizens’ Advice, to ensure everyone gets the help they need.