Treasury must not wreck universal credit and poverty progress

February 17, 2011

Commenting ahead of today’s publication of the Welfare Reform Bill, the Chief Executive of Child Poverty Action Group, Alison Garnham, said:

“The jury is still out on the universal credit. Ministers are right to aim for much better back to work support and a benefits system that makes it pay to work. But scant detail and funding shortfalls forced by the Treasury leave it in major doubt whether it will help claimants gain work, or help meet the Prime Minster’s promise to ‘make UK poverty history’.

“The Treasury is wrecking the plans from the outset by enforcing funding shortfalls that will make work pay less for millions of people, scrap access to back to work support for hundreds of thousands of claimants, and slash the childcare funding that helps many parents work.

“The new IT system is a tremendous risk because all the benefits a family receives will depend on a single major new IT system working correctly. When all your eggs are in one basket you are taking a major risk, but this is what the IT system will do for vulnerable families.

“Ministers have said that payments meant for children and childcare, which currently go directly to the parent who cares for children, may be redirected to the main earner in the household because of an IT glitch. It would be indefensible for Minsters to switch over to a new benefit system knowing it has a design flaw that will harm children. The Government must give a clear undertaking that this problem will be solved.

“Although Minsters want to avoid losers at the point of change in 2013 and beyond, there will be millions of families losing in the period leading up to the universal credit. Welfare benefit cuts of £18 billion will reduce work incentives and increase absolute poverty.”

Notes for editors
  • The Prime Minster, David Cameron, promised to make UK poverty history on 16 October 2007 in a speech at Chance UK.
  • Key concerns about the bill’s expected content include:

    1) The withdrawal rate will damage work incentives. The basic withdrawal rate of 55% has been increased to 65% under pressure from the Treasury. This will mean almost 2 million workers will have worse Marginal Effective Tax Rates (METRs) than under the current system. METRs and work incentives will be worse across all claimants compared to the 55% marginal withdrawal rate that the Centre for Social Justice argued were necessary to make a universal credit system promote increased employment. While we recognise that those working smaller numbers of hours will have increased work incentives, it is vital that the system also improves, rather than damages, work incentives for the longer hours and full time jobs needed to reduce poverty.

    2) The partner penalty. The universal credit taper mechanism reduces incentives for a partner to work. Opportunities for the partner of the main earner in a couple to find work and increase the household income are a crucial part of strategy to end child poverty. On the most recent figures, 29% of couple families are in poverty if there is only one parent in full-time work. This falls to just 7% if a partner is in part-time work, and 3% if both are in full-time work.

    3) The savings penalty. New savings limits are to be introduced for working families, with a taper from £6,000 and a cut off at £16,000 total savings. Households who save will be punished by the reduction and loss of entitlement under current proposals. The savings rules from tax credits, which allow greater savings holdings, should apply in the new universal credit system.

    4) Cuts to childcare support. The Treasury is insisting that the funds made available for childcare support must be reduced from this April. It is also expected that the remaining funds will be spread more thinly so that current recipients of the childcare element of working tax credit may lose hundreds of pounds, perhaps thousands each year. This takes place at a time when the cost of childcare is rising significantly. Instead of more parents entering work, we may see more parents leaving work because the childcare that enables them to work is no longer affordable enough to make them better off in work.

    5) IT failure. The PAYE system is to be adapted to administer the universal credit based on ‘real time’ earnings. This is an IT project on a major scale and it will be very difficult to entirely avoid problems with such a major change. The risk to families is particularly great because when all the payments they are entitled to are put into one pot, an error could mean they are left utterly destitute with nothing at all.

    6) Loss of weekly payments. Many claimants currently receive weekly payments. For vulnerable claimants in particular who may lack the skills or good mental health condition necessary for budgeting over longer periods, this will be an extremely difficult change to manage that could have damaging consequences.

    7) More means testing. Conversely, working families who currently undergo annual assessments through tax credits will be subject to monthly means-tests. Such onerous reporting requirements will create complexity and could put people off claiming universal credit.

    8) Payments directed away from children. An IT glitch is set to drive a major negative social reform by making payments for children and childcare go to the main earner in a couple, instead of the parent who cares for the children (usually the mother, so a shift from purse to wallet of thousands of pounds). There is a tremendous risk that the funds allocated to children within a household will be reduced as a consequence, especially where the main earner refuses to pass on finances that are meant for the wellbeing of children. Women’s independent entitlement will be particularly affected.

    9) Loss of back to work support. Around 200,000 claimants will lose access to back to work support. There will be no actual entitlement to support for any claimant and no system by which the claimant it empowered to take action against failure to meet Ministers’ promises to provide the standard of high quality and personally tailored support needed for successful work outcomes.

    10) Scheme-payers rights removed. People who have paid their insurance stamps week after week for perhaps decades are to have removed their full rights to support if they become sick or disabled. The contribution based employment and support allowance, which can currently be received for as long as needed, will be restricted to a maximum of 12 months. People who have paid into the scheme should not have the rights they have paid for removed.

    11) Independent living cuts. The main current benefit that supports independent living for disabled people is Disability Living Allowance. The bill will enable changes to this benefit, including the possible replacement of it, so that support for independent living is cut by 20%. In many cases, loss of support will have negative economic and fiscal consequences as disabled people will lose the care and mobility support that enables them to remain in employment.

    12) Social fund abolition. The social fund is expected to be scrapped in favour of a plethora of locally administered schemes. The fund provides crucial support when a low income household needs a lump sum to help with essential like buying a cooker or replacing a broken boiler. There is a danger that a plethora of local funds could create confusion with people not knowing where to go, or what they are entitled to. A postcode lottery may also be created, with some areas forcing far more families to resort to doorstep lenders in an emergency so that they get caught in spiralling debt.

    13) Council tax benefit abolition. The bill will scrap council tax benefit and allow it to be replaced by a plethora of local schemes, with overall funding reduced by 10%. This will add tremendous complexity and will also mean that many families will no longer receive the same level of rebate. The transparency of work incentives that the universal credit is intended to provide will be lost because of the complication of needing to account for whatever the local scheme is that affects entitlement to council tax benefit rebates.

  • 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.
  • CPAG is one of over 150 member organisations of the Campaign to End Child Poverty, campaigning for public and political commitment to ensure the goals of halving child poverty by 2010 and ending child poverty by 2020 are met.
For further information please contact:

Tim Nichols
CPAG Press Officer
Tel. 020 7812 5216 or 07816 909302 
tnichols@cpag.org.uk