Ministers will face a backlash against reform to the benefits system when millions of claimants moving on to universal credit realise their income will be cut, the government’s most senior welfare adviser has warned.
Paul Gray, chairman of the independent social security advisory committee, said that the decision to take a “substantial chunk” of funding out of the budget for universal credit risked undermining the good intentions of the reform. In 2015 his committee forced the then chancellor George Osborne to rethink and eventually ditch £4bn-worth of cuts to the tax credits system but the cuts to the universal credit budget remained.
Speaking to the Observer, Gray said the aim of universal credit – to simplify the system and encourage people back into work – was right, but he warned that building in significant budget cuts would become an issue once claimants realised they would be losing out.
“As part of the austerity programme, the last government decided it was going to take a substantial chunk out of the welfare budget,” he said. “But this will now be seen as a problem with universal credit, not a more generic issue about reducing the cost of the welfare system. That poses a significant challenge once those receiving tax credits start to migrate in serious numbers over to universal credit. Although there will be transitional protection, once a claimant’s circumstances change, a lot of people are going to realise that, because the system was modified by the austerity measures, it is now going to be financially disadvantageous to them. That is a really big challenge to come, which maybe there is not huge awareness about.
“It is a problem that a major change in the system is being introduced which will mean there are substantially more losers than gainers. Any government has got to say, if they want to offset that, where are we going to find £3bn or £4bn from? Are we going to spend less in other areas, are we going to raise taxes, or are we going to borrow more? That is a high-level political position that I don’t think a detailed scrutiny committee like mine should take a view on, or get into a campaigning position on. But it is our job to point out the consequences.”
According to the Resolution Foundation thinktank, the universal credit system will result in gains for 2.2 million working families, with an average increase in income of £41 a week. However, 3.2 million working families are expected to be worse off, with an average loss of £48 a week. About 600,000 of those who lose out, mainly couples with children, will no longer be entitled to help at all.
Gray also said there was an unfairness in the treatment of the self-employed after concerns that universal credit would lead to some ending up thousands of pounds worse off compared to an employee with the same annual earnings. The problem has emerged because of the way self-employed earnings are recorded under universal credit. A “minimum income floor” is used to calculate universal credit payments each month. Because self-employed workers’ earnings fluctuate from month to month, they sometimes fail to meet the minimum figure and lose out.
“There is a problem,” Gray said. “For the first time, we are getting serious numbers of self-employed people into the benefits system. Let’s not overlook the fact this is very difficult.
“The government has got to build in some kind of protection that means the social security system isn’t getting ripped off. My concern is that the way the parameters have been drawn at the moment means that the risk is the balance has tipped too far the other way … There is a risk that will be a disincentive to the whole entrepreneurial culture that this government and most governments are going to want to encourage.”
A spokeswoman for the Department for Work and Pensions said it was “simplistic to compare universal credit to the complex legacy benefit system”.
“Universal credit clearly shows that people are better off in work, and we know this is the best route out of poverty,” she said. “It has always been the case that when there is a change in an individual’s circumstances, their benefit entitlement may change. We are sensitive to these changes and that is why HMRC and DWP are working closely to design the best possible journey for people moving to the new system.”
In response to concern about the self-employed, she said it would not be right for the system to prop up businesses that are not viable. “That’s why, after the initial year, gainfully self-employed people are treated as if they are earning as much as working on the minimum wage,” she said. “If they are not, and they want to maintain the same level of income, they will be expected to increase their earnings rather than relying on their UC payment.”
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