Universal Credit: what went wrong? (Part 2: the design)

…continued from Part 1


The issues of implementation described before should largely go away once UC is finally rolled-out completely and the old “legacy benefits” are gone. However, some issues with UC go deeper; they are a matter system design rather than teething trouble. One is that after going through the strains of a waiting period, recipients will be reluctant to do so again – as this becomes necessary every time a couple splits up into two individual recipients, it could, for example, trap people in abusive relationships. Further, while the reliance of UC on online-based applications has the potential to make it very time- and cost-efficient, it goes beyond the possibilities of some claimants. One does not have to look far to find tales of benefit claimants who lost part of their benefits due to their incapability to handle the online process. And it seems that this is not the only area where the DWP has unrealistic expectations of claimants’ capabilities to cope with the new system. According to a survey by Citizens’ Advice, 85% of the interviewed said they would need support with more than one category out of budgeting, making monthly payments, getting online or even opening a bank account and using banking facilities. Even though the underlying idea of the monthly payment is to mirror life in employment, research has shown that only half of those earning less than £10,000 pounds a year are paid on a monthly basis, with the remainder receiving their wage in bi-monthly or even weekly intervals. Such a shortening of intervals between payments is likely to make budgeting easier.

Similar problems have arisen regarding rents payed to landlords by benefit recipients themselves rather than through the state: through promoting responsibility of recipients it has the potential to increase their independence from state paternalism and prepare them for managing their own affairs once employed. However, research supports the fear that in many cases, the result is not improved management of finances but rather rent arrears and evictions. As landlords have only imperfect information on a new tenant’s responsibility, it is rational for them to either increase rents to welfare recipients to make up for the increased risk or refuse to let to them altogether. The latter is, in fact, exactly the development that can be observed: according to the National Landlords’ Association, the number of landlords willing to let to tenants on benefits has fallen from 34% to 20% between 2013 and 2017. This can only mean that it is now much harder for benefit recipients to find housing on the market, thereby probably leading to increased calls for the provision of social housing by the state.

However, another study has found that while there is a substantial drop in rent payments in the first three payment periods of a tenant, afterwards payments are only slightly below those of the control group. It therefore seems that the added responsibility indeed improves claimants budgeting skills: around 40% of participants agreed that these had made them better at managing their money. As hoped for, there even was a positive effect on employment by participants. While the jury is therefore still out on the behavioral effects of increased budgeting responsibility on tenants and landlords, there are aspects of the new budgeting system that are clearly ineffective: for example, childcare expenses must be paid well in advance before they are reimbursed by the government. For a family running on a very narrow budget, this may even deter parents from taking up employment, as ironically the childcare it necessitates would require temporary debt. This can trap parents in unemployment.

Economic Theory tells us that, as rational actors, we should ignore sunk costs in our decision making: past investments into a project should not be taken into account when deciding whether to scrap it. Even most economists fail to follow this advice in everyday life, so it can be safely assumed that voters will not view the waste of their taxpayer money invested in UC in such a ‘rational’ way. More importantly, the ideas of predictability and streamlining embedded in Universal Credit are actually a desirable step forward towards higher employment and financial efficiency and as such worth keeping. Scrapping Universal Credit would therefore be an unnecessary waste. Nevertheless, after the preceding discussion, its reform seems almost inevitable. Therefore, the roll-out should be continued without any unnecessary waiting periods. An additional investment is probably necessary into the administrative capacity of the UC system, to ensure it is able to create efficiency gains. The empirical evidence on the effect of increased budgeting responsibilities for recipients should be more closely examined, and it must be ensured recipients have sufficient help both with IT skills and budgeting. All these might create additional costs in the short-run, but are fundamental to ensuring the system runs efficiently, creates fair results and pays off in the long run. When trying to cut costs, half-hearted implementation cannot make up for structured and thought-through reforms and will most likely produce worse results in the long-run. Recipient incentives should always be kept in mind and any inefficient ‘traps’ avoided.


Carolin Bollig is a research intern at the IEA.

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