THE AUSTERITY GENERATION: PROMISE OF GREATER REWARDS FROM WORK BROKEN UNDER UNIVERSAL CREDIT AS FAMILIES WITH CHILDREN HARDEST HIT BY CUTS

November 6, 2017

The promise of greater rewards from work made to working families has been broken as a result of cuts to Universal Credit and tax credits, with losses reaching thousands of pounds in many cases, new analysis by Child Poverty Action Group (CPAG) and the Institute for Public Policy Research (IPPR) shows.
 
‘The Austerity Generation’ reveals that the cuts to Universal Credit (UC) will put 1 million more children into poverty – which means the long term impact of austerity policies will be felt for many years to come by the UK economy and society more generally. The report also finds that families already at greater risk of poverty – including lone parents, families with very young children, larger families and those with a disability – will be especially hard-hit by a decade of cuts to the incomes of families with children.
 The analysis reveals that if the Chancellor wants to restore Universal Credit’s promise of greater rewards from work and to be poverty-fighting, not poverty-producing, then he should use this month’s Budget to:

 

  • Restore work allowances (the income level at which UC starts to be withdrawn): this would benefit all working families by an average of £150 a year – so those on UC would benefit by much more than this figure. (Table 5.5)
  • Triple-lock child benefit and child element of UC: this would be the single most effective intervention to reduce child poverty (it would reduce numbers by 600,000). (Table 5.1)

 
 
KEY FINDINGS:
1. Reduced rewards from work –

  • Working families stand to lose £930 a year on average (Figure 3.11) from cuts in the tax credit system and £420 a year (Figure 3.12) from cuts to Universal Credit – these are losses across the population, so the losses for tax credit and UC recipients would be much higher.
  • Freezes and cuts to Universal Credit work allowances will leave lone parents worse off by, on average, £710 a year, couples £250 a year. (Section 3e)
  • Work allowance cuts have the greatest impact in cash terms on households in the second and third deciles, ‘JAMs’, the ‘just about managing’ group. The percentage impact is highest for the first (the poorest) decile. (Figure 3.21)
  • In order to make up the losses caused by the cut in work allowances, a full-time working couple on the ‘national living wage’ would have to work 17 extra working days a year. A lone parent already working full time for the ‘national living wage’ would have to work 41 extra days a year to recoup their loss – equivalent to a fourteen month year. (Box 3.3)

 
2. Fixing Universal Credit
The organising principle of Universal Credit was to strengthen the rewards from work but this analysis shows that, while work incentives may have improved for some families, big falls in family income caused by cuts and changes to Universal Credit have left many worse off overall, overwhelming any gains from increases in the ‘national living wage’, personal tax allowances and help for childcare. (Section 1b)
 

  • For example, a couple family with two young children would see its work incentives improve - from an effective tax rate of 88 per cent to 75 per cent (including childcare costs needed to start work) – if the second earner started work at 16 hours a week (both on minimum wage). But, crucially, the family would remain £486 a year worse off as a result to cuts to Universal Credit. Changes to Universal Credit may have reduced the family’s effective tax rate for any extra hours but they have also cut overall family incomes significantly. (Figure 4.6)

 
The report identifies – and costs up – a number of potential fixes for Universal Credit. See note to editors (7) below.
 
3. Cuts hit families with children hardest, especially lone parents
Under both the tax credit and Universal Credit systems families with children have taken the biggest hit from cuts over the decade. Children in lone parent families already face almost twice the risk of poverty of those in couple families (47 per cent and 24 per cent, respectively) but are hit particularly hard by changes made since 2015.
 

 
For example, for a lone parent with two children, aged two and five, considering moving into work at either 12 or 24 hours a week, the cuts to Universal Credit have cut effective hourly earnings and raised effective tax rates: (Table 4.1)

 

4. Families already at greater risk of poverty will lose most
All these figures are averages across the population, meaning losses for affected households can be much higher.
Families with the lowest incomes

  • Tax Credits: Households in the poorest two deciles are projected to be more than 8 per cent worse off by 2020-1. The ‘just about managing’ are also hit: households in the third decile are set to be nearly 6 per cent worse off and those in the fourth decile more than 4 per cent worse off. (Figure 3.3)
  • Cuts to Universal Credit have been more steeply regressive, with the poorest 10 per cent to lose 10 per cent of their income (£450 a year) on average compared with what was promised by Universal Credit. (Figure 3.4)

Larger families

  • Tax Credits: Families with three children will be almost 9 per cent (£2,860) worse off, and those with two children about 6 per cent (£2,120) worse off. (Figure 3.5)
  • Universal credit: The average family with three children will be 10 per cent (£2,540 a year) worse off, and the average family with four children or more children 19 per cent (£5,000 a year) worse off due to Universal Credit cuts. (Figure 3.6)

Families where someone is disabled

  • Tax credits: Families containing someone with a disability will be £720 a year worse off, families with someone with a severe disability will be £870 a year worse off. (Figure 3.9)
  •  Universal credit: Families containing someone with a disability will be £300 a year worse off; families containing someone with a severe disability will be £530 a year worse off due to Universal Credit cuts. (Figure 3.10)

 
5. Real terms cuts to benefit adequacy

  • Tax credits: The poorest decile loses £510 a year in cash terms, but is proportionally the hardest hit by uprating decisions. The second and third deciles lose £1,150 and £1,110 respectively. (Figure 3.17)
  • Universal Credit: Uprating decisions will cost the average single parent family £710 a year, with the average couple with children losing £430 a year. (Section 3e)
  • The freeze in Universal Credit and child benefit uprating would add 300,000 children to poverty levels. (Table 3.9)

 
6. Two-child limit
The two-child limit is expected to affect 640,000 families each year, containing 2 million children, by 2020/21. Two-thirds of these will be working families. Child Poverty Action Group has been granted permission for a judicial review of the policy, but a hearing is not expected until after the New Year.

  • Tax credits: Families with 3 children will lose out, on average, £460 a year (2 per cent of their income) and families with four or more children £1,210 (almost 5 per cent) a year. (Figure 3.13)
  • Universal Credit: On average, a family with three children loses out on £530 a year and a family with four or more children £1,180 a year. These are average losses across the whole population so losses amongst Universal Credit recipients will be much higher and can reach up to £2,780 for each third or subsequent child. (Figure 3.14)
  • Once fully rolled out, the two-child limit in Universal Credit would put 200,000 children in poverty. (Table 3.9)

 
7. Child poverty rising

  • Tax credits: the cuts to tax credits would put 700,000 children in poverty and 500,000 in severe poverty by the end of the decade, assuming the absence of Universal Credit. (Table 3.6)
  • Universal Credit: the cuts to Universal Credit would put 1,000,000 children in poverty and 900,000 in severe poverty by the end of the decade, assuming the absence of tax credits. (Table 3.9)

 
 
Alison Garnham, Chief Executive, Child Poverty Action Group, said:
 
“This report is the closest anyone has come to producing a cumulative impact assessment of a decade of social security cuts on families with children. It’s an incredibly detailed piece of work but its basic story is straightforward and shaming: since 2010, rather than investing in our children, government policy has been creating an Austerity Generation whose childhoods and life chances will be scarred by a decade of political decisions to stop protecting their living standards. This is the choice that’s being made in our names.
 
“The promise of increased rewards from work made to families with children under the new Universal Credit benefit has been broken. The Universal Credit we see today is not the Universal Credit that was sold to everyone a few years ago. Even after taking into account increases in the minimum wage, rising tax allowances and extra childcare help, working families will be the biggest losers from cuts made to the benefit system. Cuts to Universal Credit have substantially reduced the rewards from work for many families. Cuts and freezes to the work allowances will leave lone parents worse off by £710 a year on average, and couples £250 a year on average, across the population. 
 
“If the government’s flagship anti-poverty measure ends up rolling out poverty then it’s hard not to see that as a colossal failure of public policy.
 
“This month’s Budget is an opportunity for the Chancellor to mount a full-scale rescue mission for Universal Credit. Child Poverty Action Group was the first to sound the alarm about the 6 week wait for Universal Credit, so progress on that would be very welcome, but this report makes it clear that the problems are more fundamental - the whole point of Universal Credit is being undermined. The Chancellor should restore work allowances, put a stop to the benefit freeze that’s squeezing families and pledge to give children’s benefits the same protection from rising prices as is given to the basic state pension.”

ENDS
 
Notes to editor
 
(1)  Media contact: Jane Ahrends on 020 7812 5216, 07816 909302 or jahrends@cpag.org.uk or Imran Hussain on 079834 02283
(2)  Embargoed copies of the report (99 pages) are available on request.
(3)    The analysis considered the impact of 34 separate cuts and changes to the existing tax credits and benefits system and 10 to the new Universal Credit system since 2010. The impact of an additional 24 cuts and changes to the existing system was not able to be modelled for technical reasons. Each of these cuts is listed in pages 5-12.
(4)  The roll-out of Universal Credit for all new applicants is expected to be completed in the autumn 2018. Tax credit claims are not expected to be fully transferred to Universal Credit until 2022 at the earliest.
(5)  The latest IFS poverty projections show child poverty rising from 27 per cent (2011-12) to 37 per cent (2021-22) https://www.ifs.org.uk/publications/10028
(6)  A major study by the LSE (Kerris Cooper and Kitty Stewart, 2017) found poorer children have worse cognitive, social-behavioural and health outcomes because they are poor, and not just because poverty is correlated with other household and parental characteristics http://www.lse.ac.uk/News/Latest-news-from-LSE/2017/07-July-2017/Income-...
(7)  The analysis identified a number of policy options to make Universal Credit poverty-reducing again:
 

* With first child premium still removed.                                
Source: analysis of 2014/15 family resources survey using the IPPR tax-benefit model                                                    
 
(8) CPAG is the leading charity campaigning for the abolition of child poverty in the UK and for a better deal for low-income families and children.
(9) CPAG is the host organisation for the Campaign to End Child Poverty coalition, which has members from across civil society including children’s charities, faith groups, unions and other civic sector organisation, united in their campaigning for public and political commitment to ensure the goal of ending child poverty by 2020 is met.