|Date:||03 February 2016|
|Authors:||James Browne , Andrew Hood and Robert Joyce|
|Publisher:||Institute for Fiscal Studies|
|Journal, book or Issue Title:||IFS Green Budget 2016|
Over the course of this parliament, the government is rolling out the most radical reform to the working-age benefits system for decades. A single means-tested payment, known as universal credit (UC), is being introduced as a replacement for six existing means-tested benefits and tax credits for those of working age: income support, income-based jobseeker’s allowance, income-based employment and support allowance, child tax credit, working tax credit and housing benefit.
The ‘legacy’ system that UC will replace is largely the product of a history of separate decisions to layer new strands of support on top of what came before: for example, the decisions in the 1970s to create a national system of housing benefit and a new form of support for low-income working families. Previous social security reforms, including the Fowler reforms of the late 1980s and the introduction of the current tax credit system in 2003, stopped far short of the ambitious integration of benefits that UC will bring about. The central point of UC, and the reason for many of its potential advantages, is that it replaces the resulting jumble of separate and overlapping means tests with one integrated assessment of families’ entitlements. UC should look more like a system that has been designed from scratch as a coherent whole – as indeed it is.
Unsurprisingly with such a radical structural overhaul, its impacts on the incomes and incentives of different households are complicated. They depend on the precise combination of benefit entitlements that a household has under the legacy system – the product of multiple separate benefit entitlement calculations – which in turn depends on a wide array of household characteristics. The impacts also depend, of course, on the structure of UC that the government chooses. That plan has changed significantly since the idea of UC was first set out. In particular, the so-called ‘work allowances’ – the amounts working families can earn before UC starts to be withdrawn – have been repeatedly reduced relative to the initial UC proposal, significantly cutting the amount of support that UC will give to low-income working families.
The main purpose of this chapter is to set out the impacts on incomes and incentives of introducing UC, given the current (substantially revised) plans for how UC will look. We also review some of the other very important changes that will be associated with the introduction of UC, such as the regime of conditionality, and discuss its potential effects on behaviour, such as labour supply and take-up of benefits.
This chapter of the IFS Green Budget 2016 covers the following points:
This chapter was presented at the Green Budget launch on 8 February 2016. All presentations are available to view on our Youtube Green Budget 2016 playlist.