The (changing) effects of universal credit Robert Joyce 30 th June 2016
Introduction Main aim here is to shed light on what the current UC plans mean for incomes and financial work incentives of different groups Draws heavily on Chapter 10 of February s IFS Green Budget: www.ifs.org.uk/uploads/gb/gb2016/gb2016ch10.pdf Will also talk about early evidence on labour market impacts integration with wider welfare system Lots of issues that I won t have time to cover in any detail, e.g.: Administration of benefit claims Changes in frequency of payment Payment of all a family s benefits to a single bank account Ending of direct payments to social landlords Job search conditions extended to in-work claimants Treatment of the self-employed
Weekly benefits (2015-16 prices) The structure of financial support: legacy system Example lone parent with two children 350 300 250 Working tax credit Child tax credit Housing benefit Jobseeker's allowance 200 150 100 50 0 0 5 10 15 20 25 30 35 40 45 50 Notes and sources: see Figure 10.3 of Green Budget document Hours worked at National Living Wage
Number of individuals Financial incentives affect people s choices Weekly hours worked by lone parents in 2013-14 140,000 Working Tax Credit kicks in 120,000 100,000 80,000 60,000 40,000 20,000 0 0 5 10 15 20 25 30 35 40 45 50 Weekly hours worked Notes and sources: see Figure 10.4 of Green Budget document
Weekly benefits (2015-16 prices) The structure of financial support: the UC reform Example lone parent with two children 350 300 250 200 Work allowance Working tax credit Child tax credit Housing benefit Jobseeker's allowance Universal credit 150 100 50 0 0 5 10 15 20 25 30 35 40 45 50 Notes and sources: see Figure 10.3 of Green Budget document Hours worked at National Living Wage
Changes in planned 2017-18 work allowances per month Claiming support for housing costs 2012 2015 % cut since 2012 plan Single, no children 114 0 100% Lone parent 272 192 29% Couple without children 114 0 100% Couple with children 228 192 16% Disabled 198 192 3% Not claiming support for housing costs Single, no children 114 0 100% Lone parent 755 397 47% Couple without children 114 0 100% Couple with children 551 397 28% Disabled 667 397 40% Notes and sources: see Table 10.1 of Green Budget document
Direct impacts of UC on incomes are complex Winners and losers by income decile among working-age households 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Poorest 2 3 4 5 6 7 8 9 Richest Total Income decile group Reduction No change Not entitled to benefits Increase Notes and sources: see Figure 10.6 of Green Budget document
Average change in benefit entitlement Direct impacts on incomes (1) Impacts of long run UC system on households entitled to legacy benefits 600 400 200 0-200 - 400-600 - 800-1,000-1,200 Out of work In work Out of work In work Renters Owner-occupiers Notes and sources: see Figure 10.1 of Green Budget document
Average change in benefit entitlement Direct impacts on incomes (1) Impacts of long run UC system on households entitled to legacy benefits 600 400 200 0-200 - 400-600 - 800-1,000-1,200 Out of work In work Out of work In work Renters Owner-occupiers Notes and sources: see Figure 10.1 of Green Budget document
- 2,500-2,000-1,500-1,000-500 0 500 1,000 Direct impacts on incomes (2) Impacts of long run UC system on households entitled to legacy benefits Single, not working Single, in work Lone parent, not working Lone parent, in work Couple, no children, no earners Couple with children, no earners Couple, no children, one earner Couple with children, one earner Couple, no children, two earners Couple with children, two earners Multi-family household, no children Multi-family household with children All Average change in benefit entitlement Notes and sources: see Figure 10.7 of Green Budget document
- 2,500-2,000-1,500-1,000-500 0 500 1,000 Direct impacts on incomes (2) Impacts of long run UC system on households entitled to legacy benefits Single, not working Single, in work Lone parent, not working Lone parent, in work Couple, no children, no earners Couple with children, no earners Couple, no children, one earner Couple with children, one earner Couple, no children, two earners Couple with children, two earners Multi-family household, no children Multi-family household with children All Average change in benefit entitlement Notes and sources: see Figure 10.7 of Green Budget document
Does UC make work pay? Measure financial work incentives in two ways: 1. Incentive to be in work at all participation tax rate (PTR) 2. Incentive to earn a little more effective marginal tax rate (EMTR) Higher numbers mean weaker work incentives
Effect of UC on incentive to work now very mixed Effect of UC on Participation Tax Rate (PTR) 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Percentage of individuals whose PTR: Falls by at least 20ppts Falls by 5 10ppts No change Increases by 5 10ppts Increases by at least 20ppts Falls by 10 20ppts Falls by less than 5ppts Increases by less than 5ppts Increases by 10 20ppts Notes and sources: see Figure 10.8 in Green Budget document
PTR under legacy system But still strengthens incentives a lot where weakest Effect of UC on PTR, by PTR faced under legacy system All Less than 50% 50 60% 60 70% 70 80% 80 90% 90 100% At least 100% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Percentage of individuals whose PTR: Falls by at least 20ppts Falls by 10 20ppts Falls by 5 10ppts Falls by less than 5ppts No change Increases by less than 5ppts Increases by 5 10ppts Increases by 10 20ppts Increases by at least 20ppts Notes and sources: see Figure 10.8 in Green Budget document
Lots of variation by demographic group All Lone parent Partner not working, with children 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Percentage of individuals whose PTR: Falls by at least 20ppts Falls by 10 20ppts Falls by 5 10ppts Falls by less than 5ppts No change Increases by less than 5ppts Increases by 5 10ppts Increases by 10 20ppts Increases by at least 20ppts Notes and sources: see Figure 10.9 in Green Budget document
EMTR under legacy system The incentive for those in work to earn more Effect of UC on EMTR among workers entitled to legacy benefits, by EMTR faced under legacy system All Less than 40% 40-50% 50-60% 60-70% 70-80% 80-90% At least 90% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Percentage of individuals whose EMTR: Falls by at least 20ppts Falls by 10 20ppts Falls by 5 10ppts Falls by less than 5ppts No change Increases by less than 5ppts Increases by 5 10ppts Increases by 10 20ppts Increases by at least 20ppts Notes and sources: see Figure 10.12 in Green Budget document
Average caseload (million) Changing assumptions about UC roll-out 8 7 6 5 4 3 2 1 0 2014 15 2015 16 2016 17 2017 18 2018 19 2019 20 2020 21 March 2013 assumption December 2013 assumption December 2014 DWP December 2014 OBR July 2015 assumption November 2015 DWP November 2015 OBR Notes and sources: see Figure 10.5 of Green Budget document
Actual effects of UC on labour market What quantitative evidence do we have? Evidence from DWP very limited in scope at this stage Though still interesting, and seems robust Looked at non-disabled singles without children who don t claim support for housing costs (in areas where rollout began earlier; new claimants only) Nationally that group is about 10% of the population who ll be on UC And not particularly typical, e.g. we estimate that on average the group sees no change in financial incentive to work (PTR) due to UC
Actual effects of UC on labour market What does the evidence tell us? For the very specific group analysed, DWP found UC increased: Chances of being in work at some point in first 9 months by 8ppts Chances of actually being in work after 9 months by 3ppts Total earnings over first 9 months by 2% (not statistically significant) What might we tentatively conclude from this? UC may be attracting significantly more to do a small number of hours in short-term work Though aspects of UC that might help with job progression (e.g. inwork conditionality) could take > 9 months to have full effect Effects on behaviour of financial vs non-financial changes...?
Integration with rest of welfare system A few questions here two that probably affect the most people: 1. Council tax support (see www.ifs.org.uk/publications/6183, ch 7) - Kept outside of UC (and localised) - Has potential to seriously undermine rationalisation, integration and simplicity that UC would otherwise bring to system... -...including re-introducing extremely weak work incentives - Tricky design issues for LAs in deciding how UC and CTS interact 2. Assessing entitlement for free school meals Doesn t look possible to replicate current system in this regard Still not clear what government will do, and hence who winners/losers will be from this
Conclusions UC less generous than current system (and original plan) on average But many winners as well as losers Planned structure of financial support under UC has changed a lot But perhaps the most welcome effects here remain: getting rid of the most severe and arbitrary disincentives caused by current system (notwithstanding separation of council tax support) Other aspects of reform could also turn out to be very important......while administrative challenge of implementation may carry the greater risks to the program Don t yet know much about impacts on behaviour Huge once-in-a-generation opportunity for learning