An examination of the flagship reform, which will merge six benefits into one monthly payment and are intended to always make people better off in work, found the incentives would increase where the current system creates the worst problems.
However, a series of “pre-emptive cuts”, including the reduction in work allowances announced in last year’s post-election Budget, mean UC will reduce the generosity of the benefit system in the long run.
In particular, the system will be less generous to working families, with an estimated 2.1 million likely to get less in benefits as a result – an average loss of £1,600 a year – although 1.8 million will get more, with an average annual gain of £1,500.
The reform will also weaken the incentive for single parents to be in work, but strengthen the incentive for couples to have one person in work (rather than none or two). On average, working single parents will effectively keep 8% less of their earnings because of the way UC is withdrawn as their earnings rise.
The change would, however, “dramatically reduce” the number of people who face the largest financial disincentives to move into or stay in work. The number of people who lose more than 70% of their pay in taxes and withdrawn benefits, or would lose that much if they moved into work, will fall by two-thirds from 2.1 million to 700,000.
Incentives will also be increased for those in work to earn more. The 800,000 working individuals who would currently keep less than 20p of an additional pound earned would all keep at least 23p if the long run UC system applied now.
Robert Joyce, report author and associate director at the IFS, said the long run effect was to reduce benefits for working families on average, a reversal of the original intention of the reform.
“However, the potential gains from simplifying the working-age benefit system remain mostly intact: Universal Credit should make the system easier to understand, ease transitions into and out of work, and largely get rid of the most extreme disincentives to work or to earn more created by the current system,” he added.
Responding to the IFS, a Department for Work and Pensions spokesman said Universal Credit was transforming lives across the country, with claimants moving into work significantly faster and earning more than under the old system.
“UC is on schedule and will be in all jobcentres by spring. Once fully rolled out it will generate £6.7bn in economic benefit every year,” he added.
“We welcome the IFS analysis which shows that UC will make work pay and increase financial incentives for people to work more, while also bringing the welfare bill under control. Universal Credit also includes a wide range of additional benefits – including increased childcare and more support from a dedicated work coach both things that were ignored in the IFS’s analysis.”
The IFS report was published as the Public Accounts Committee raised fresh concerns about the rollout of the scheme.
According to the committee, the estimated completion date for the rollout of the Universal Credit’s digital service has been put back six months compared to when the PAC examined the programme last year.
The Department for Work and Pensions now expects that UC will be fully operational in March 2021. However, the Office for Budget Responsibility has forecast a further six-month delay, which the PAC said would postpone the programme’s expected benefits and may increase costs.
Chair Meg Hillier said the “lack of transparency surrounding a programme with such wide-reaching implications for so many people is completely unacceptable”.
She added: “This lack of clarity creates needless uncertainty for claimants and those tasked with running the programme. It’s also an unnecessary obstacle to Parliament and taxpayers holding the government to account.”
Ministers should “set out and report publicly against a wider set of clearly stated milestones” to improve clarity of the scheme, and update the business case, the PAC’s Universal Credit: progress update report recommended.