The UK is part-way through almost unprecedented real-terms reductions in government expenditure as the government attempts to deal with the large hole in the public finances. As part of this, the UK government has announced and is in the process of implementing £18 billion of cuts to welfare spending (that is, spending on benefits and tax credits) by 2014. It has also announced plans to begin the national roll-out of a new Universal Credit from October 2013, which will replace six means-tested benefits with a single integrated benefit. Universal Credit represents the most significant change in the structure of the welfare system since the 1940s and is aimed at reducing administration costs and errors, simplifying claims, encouraging take-up and strengthening the incentive to work for those currently facing the weakest work incentives.
We estimate that the UK coalition government’s welfare reforms reduce total benefit and tax credit entitlements in Wales by around £520 million (or £590 million if Universal Credit is excluded). This corresponds to about £6.40 per family per week on average (or £7.26 if Universal Credit is excluded), roughly 1.5% of their net income. Unsurprisingly, the top fifth of the income distribution loses rather less than this, since they were receiving less in benefits and tax credits to start with and therefore bear less of the brunt of cuts. Yet we find that the biggest average losses are experienced not by the very poorest households, but by the lower-middle of the income distribution. This is partly because in-work support (particularly Working Tax Credit) is being cut more sharply than out-of-work support, and partly because Universal Credit is a giveaway primarily to the lowest-income third of families, partly offsetting the losses those families experience from the wider welfare cuts. One-earner couples with children are the biggest losers from the welfare cuts, on average, but they are also the biggest gainers from Universal Credit; overall, therefore, the biggest average losses are experienced by non-working families with children, who lose both from Universal Credit (if they have significant unearned income, such as from savings or spousal maintenance) and from the wider benefit cuts. Pensioners, and families without children in which all adults work, are largely protected from the cuts.
But it is important to look beyond this analysis of winners and losers–how entitlements would change if no one changes their behaviour in response to the reforms. For reforms as radical as these, it is vital to understand how individuals’ choices over whether and how much to work are likely to be affected. Yet no such analysis has previously been published. This report attempts to quantify, as far as possible, the likely effects of the UK coalition government’s welfare reforms (excluding tax changes) on labour supply in Wales. Because it is such a major reform in its own right, and because it is being phased in only gradually over a period of several years, we separate out Universal Credit from the other reforms and consider the effects of the reform package, both excluding Universal Credit completely and assuming it was fully in place.
This research was funded by the Welsh government and the ESRC Centre for the Microeconomic Analysis of Public Policy at the Institute for Fiscal Studies.