Like many EU countries, the UK is implementing a fiscal consolidation package consisting chiefly of reductions in government expenditure in response to a large structural budget deficit. Reductions in welfare spending are a key component of this package. As well as reducing expenditure, the UK government hopes that its welfare reforms will encourage work. The largest structural reform planned is the introduction of a universal credit to combine six means-tested benefits for those of working age into a single payment. However, other benefit cuts and tax rises that form part of the fiscal consolidation package will also affect incomes and work incentives, and falling real wages over the period when these changes are being introduced will tend to make work less attractive as well as making workers worse off. In this paper we use micro-simulation techniques to investigate whether financial work incentives will be stronger in 2015–16 than they were in 2010–11 and to separate out the impact of tax changes, benefit cuts and the introduction of universal credit from the impact of wider economic changes.
This paper was presented at a workshop on 'Expenditure-based consolidation: experiences and outcomes' organised by the European Commission Directorate-General for Economic and Financial Affairs (DG ECFIN) in Brussels on 20 January 2015.