Universal credit is on course to deliver only marginal taxpayer savings despite driving through huge cuts in benefit payments to many claimants, according to the Office for Budget Responsibility (OBR).
The independent forecaster said that even these relatively slender £1bn savings – amounting to 2% of the social security budget – could be knocked off course if ministers reversed potentially unpopular cuts built into universal credit affecting tax credit recipients, disabled people and self-employed claimants.
It said political uncertainties and problems with the design and implementation of the much-delayed project, currently around five years behind schedule, meant universal credit presented a “significant risk” to public spending.
The OBR added that it was too early to say whether claims made by ministers that universal credit was working – because it had successfully persuaded claimants to move into work or to work more hours – were correct, saying there was “insufficient evidence to judge”.
The report was welcomed by the Resolution Foundation as an “authoritative” account of the pressures affecting universal credit, confirming that the system would be less generous than planned because of cuts. The thinktank estimates that universal credit cuts will leave 1m working households an average of £2,800 a year worse off by 2022.
David Finch, Resolution’s senior economic analyst, said: “Today’s report should spur a debate about how to get such a large welfare reform right. Now is the time for reforms to ensure it delivers the labour market and wider living standards boost it was originally designed to provide.”
The OBR pointed out that some of the gross savings anticipated from universal credit were predicated on driving through cuts to relatively large numbers of families.
Public anger over cuts to tax credits, disability benefits, and changes to national insurance contributions for self-employed workers have driven the most significant government welfare policy U-turns in recent years.
“The experience of past – typically smaller – welfare reforms is that they often take longer than expected to deliver, save less than anticipated and create political pressure to compensate losers,” the Welfare Trends report published on Thursday said.
Universal credit is expected to consume around £63bn of expenditure by the time its rollout is completed in 2022-23, accounting for around two-thirds of working age welfare spending. Around 660,000 people now claim universal credit, a number expected to rise eventually to 7 million.
Although its aim of simplifying social security by rolling up six working-age benefits into one payment – including tax credits, housing benefit and jobseeker’s allowance – has attracted wide political support, it has been dogged by design and administrative flaws that have left poorer claimants homeless, hungry and in debt.
The OBR report states: “The move to universal credit has been – and remains – an enormous design and delivery challenge for the government, notably the Department for Work and Pensions (DWP). The rollout has already been delayed repeatedly. Universal credit is now designed to save money, relative to the legacy system it replaces, rather than to cost more, as in the original vision.”
It adds: “A welfare reform of this scale and nature is also a huge forecasting challenge and a source of significant risk to the Treasury in terms of public spending control.”
The OBR estimates that, based on the current design, universal credit will deliver £1bn of net savings to the social security budget by the time it is fully rolled out in 2022 – equivalent to only 2% of the total amount it would have spent on existing benefits had the new system not been introduced.
The system has made an estimated £11bn in savings, mainly through cuts to the generosity of universal credit – most notably through reductions to work allowances, which will save around £3bn, and the removal of £2bn in disability premium payments – but it has also incurred £8.5bn in expenses.
These include higher take-up of benefits – the “one-stop shop” nature of universal credit means that £2.5bn currently unclaimed by social security recipients who fail to take up all of the benefits they qualify for will be automatically paid – and £1.5bn in transitional protections for people moving over to the new system.
The OBR said shortcomings with tools used to measure and monitor the progress of universal credit were “far from ideal”. Many elements of monitoring architecture were “opaque, poorly integrated and take too long to produce robust results”.
A Department for Work and Pensions spokesperson said: “Universal credit is about helping people improve their lives – and it’s working. People on universal credit are finding work faster than those on the old system, staying in it for longer, and keeping more of what they earn. And working parents can get up to 85% of their childcare costs back.
“Universal credit also supports people who are out of work and it encourages people to manage their money month-to-month, just like they would in work. In the long-term, it will help deliver a welfare system that is sustainable for those who use it and fair to taxpayers who fund it.”
However, the OBR report also questions ministerial claims that universal credit delivers improved job market outcomes. It points out that “modest but positive” effects found by trials were based on older versions of the system, not the more complex full system currently being rolled out.
The chief executive of Child Poverty Action Group, Alison Garnham, said: “Despite all the damage and upheaval, and the assurances that the benefit is on track, universal credit is bringing minimal savings to the public purse – just £1bn. It also brings at best a slight improvement in people’s chances of working, despite this being one of the central aims of the programme.
“The OBR’s findings raise serious questions about whether universal credit in its current form is viable. Yet half our children will be in a household dependent on it so we have to fix it or set it aside.”
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