Universal Credit ‘risks substantial cost to taxpayer’

10 Mar 15

The government’s Universal Credit benefit reform is likely to encourage more claimants into work, but could see them choosing to work shorter hours, at considerable cost to the Treasury, a Resolution Foundation inquiry has found.

Credit where it’s due? – the interim report of the foundation’s major inquiry into the government’s flagship benefit reform – argues that ‘work allowances’ will boost work incentives. These allowances allow recipients to keep full benefit entitlements when they start work up to a specified earnings limit.

But it warned that work allowances brought significant new risks, as some people may opt to work shorter hours in order to stay under the earnings limit and keep their full benefits. This would present ‘considerable cost to the state’ from the scheme to merge six benefits into one payment, the think-tank stated.

Universal Credit will also offer in-work benefits to hundreds of thousands of workers without children who have not been eligible for such help before. The report said it was difficult to know how this group would respond. It noted that a full-time worker in rented accommodation without children and on the National Minimum Wage could work one fewer eight-hour shift a week and see their disposable income drop by just £12. Lower tax payments and increased UC support would offset £40 of the drop in earnings.

David Finch, senior economic analyst at the Resolution Foundation, said UC was likely to have a major effect on the labour market and presented potential risks.

‘Those brought into the labour market might find themselves stuck in low hours of work, with little financial gain to be had from increasing their hours. Similarly, many existing workers will find that over three-quarters of any fall in their earnings will be absorbed by UC, which may result in some people working fewer hours.

‘As UC is rolled-out over the next parliament it is important that the strong incentives to find work are protected, but not at the cost of people reducing the hours that they work or getting stuck on short hours and low pay.’

Report co-author Mike Brewer, professor of economics at the University of Exeter, also criticised UC’s failure to include council tax support.

‘For many low-income households [this] will mean multiple form-filling and distorted work incentives. The monthly reporting requirements could also result in families with children and the self-employed losing vital UC support.

‘More needs to be done to safeguard and strengthen the welcome simplification of the benefit system under UC.’

  • Vivienne Russell

    Vivienne Russell is managing editor of Public Finance magazine and publicfinance.co.uk

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