Universal Credit: a good idea but certainly no cure-all
The DWP is getting serious about the plans to merge a host of existing benefits into a Universal Credit (UC) with a single taper rate. There are two main aims. One is to simplify the system to increase its predictability (and in order to reduce waste and fraud). The other is to make benefits partially portable into working life, so that recipients who move into work can be sure they will gain from doing so. By moving people into work, Iain Duncan Smith believes that the system will ultimately save £9bn annually.
UC may well achieve the first aim, which would already be a big improvement. Greater predictability could well have an employment-boosting effect of its own, even if it did not, in itself, improve the financial payoff from moving into work. To use an analogy: suppose a restaurant, R1, always delivers food of a quality level “Q”. In the competing restaurant R2, the quality level is also Q on average, but it varies greatly with each visit: it can be well above, but also well below Q, so by choosing R2, you can be in for a very pleasant, but also for a very unpleasant surprise. While there are some consumers who enjoy gambles, we know empirically that most will prefer R1 (assuming, of course, that R1 and R2 are otherwise identical).
For people who are in receipt of more than two benefit types, or who receive benefits while simultaneously paying income tax and NIC, increasing their workload is not unlike going to restaurant R2. Since benefits interact with one another and with the tax system in complex ways, it is hard to predict what the impact on disposable income will be in an individual case. This uncertainty is exacerbated by the possibility of tax credit repayments, where people have to pay back previously received income supplements.
However, there is good reason to be suspicious of the alleged £9bn savings. The Universal Credit is meant to have a lower taper rate than the combined taper rates of the present benefit system. In very crude terms, this can be thought of as in the graph below, where the blue line would represent the present system: as income increases, benefits are withdrawn quickly. (In reality, this is of course anything but a straight line). UC would look more like the red line, where benefits are withdrawn more slowly.
Apparently, IDS expects a lot of people to move from the intercept with the Y-axis (=worklessness), or from a position like A (=minor employment), to a position like B (=several days a week of paid work). But a lower taper rate also enlarges the circle of recipients. This entails extra costs, even if none of the new recipients change their behaviour. But some of them could very well switch from a position like C (=full-time work) to B, where they would enjoy more leisure while earning as much, or nearly as much, as before. This would lead to higher benefit payments to people who don’t need them.
One could argue that if UC helps to overcome chronic worklessness, then the fact that some people are taking a free ride is a tolerable side-effect. But at the very least, since we cannot know exactly how people will respond to the new incentive structure, UC should not be promoted as a big cash cow.