Universal Credit – an alternative approach

Background

The drawbacks of Britain’s fragmented welfare system are widely understood. It is a system that has grown in fits and starts over the last 65 years, and it shows.

When customers wish to start work or increase their wages, they have to make several different calculations to work-out how much of each benefit they would lose and therefore whether it is worthwhile taking on a job. In practice, most people cannot perform these calculations, and so cannot estimate accurately how much better off by working they will be.

Furthermore, the net rewards for working are often small once the benefit deductions have been factored-in. The current system is slow to respond to changes in customer’s circumstances and this results in overpayments that are hard for people on low incomes to repay.

Thus many people prefer to not start work and upset their benefits apple cart. This is a barrier to working, and contributes to a culture of welfare dependency.

This is why we have arrived at the Universal Credit, currently at white paper stage.

Under the Universal Credit, it will be easier for customers to work-out how much better off they will be by working. There would also be long-term savings to the public purse, as the Universal Credit will eliminate handling by more than one agency and be less susceptible to fraud. But the Universal Credit might cost £2.7 billion per annum to implement (The Centre for Social Justice, 2009), only breaking even after 5 years.

The local authority perspective

Logically, the Universal Credit will be run by just one agency. So, the Government will have to choose one out of the current benefit-providing institutions to run the Universal Credit: HMRC, Jobcentre Plus, or local authorities.

The White Paper tells us that the DWP will run the Universal Credit. Presumably, it will choose to do so through its own agency, the Jobcentre Plus.

In this case, function of local authorities would be reduced to assessing Council Tax Benefit, which is to be left out of the Universal Credit (click here to see a full list of what’s left for local authorities to run).

But if the Universal Credit had been given to local authorities to run, it would have been a fantastic opportunity for local authorities to target other services that they support (e.g. training and support services) and link them with the Universal Credit. It would improve the local authority’s offer to its community.

Therefore, I believe that local authorities should campaign for the right to run the Universal Credit.

How could local authorities “win” the right to run the Universal Credit?

I propose a simple amendment to the Housing Benefit scheme which would create a cost-effective version of the Universal Credit. It would make use of the existing legislative framework and existing IT systems in their current state. It would be very cheap and simple to introduce (much less than the reported £2.7 billion per annum): this is one of its selling points.

Local authorities also have the advantage of being able to offer high quality, localised conditionality, through their already sophisticated links to the community. This is its other selling point.

How would a Universal Credit based on the Housing Benefit scheme work?

In a sense, the entire welfare system is already built into the Housing Benefit system. This has been the case since 1988, when Margaret Thatcher’s Government took the sensible step of aligning Housing Benefit with the other means-tested benefits. In essence, half of the work was done back in ’88, and this model takes advantage of this.

This is the current formula for Housing Benefit:

Income – Applicable Amount = Excess Income x 65% = “Taper”

Rent – non-dependant deduction – “Taper” = HB.

In this Universal Credit model, the formula would be amended to:

Income – Applicable Amount = Excess Income x 65% = “Taper”

(Rent + Applicable Amount) – non-dependant deduction – “Taper” = Universal Credit.

In other words, the Applicable Amount is added on to the rent, to create this version of the Universal Credit.

Creating a Universal Credit in this way makes good use of the fact that the Applicable Amount in Housing Benefit is already the same as the amount of other income-related benefits (i.e. Income Support, Jobseekers Allowance and Employment and Support Allowance).

For customers with no housing costs, this Universal Credit model would look like this:

Income – Applicable Amount = Excess Income x 65% = “Taper”

(0 + Applicable Amount) – non-dependant deduction – “Taper” = Universal Credit.

The above formula can be amended to suit political objectives. For example, the percentage of excess income that becomes the “Taper” could be altered, as could the Applicable Amounts. Furthermore, the Council Tax could be added to the “(Rent + Applicable Amount)” part of the calculation, thus keeping Council Tax Benefit in the Credit.

Alternatively, within this model, the Applicable Amount could be taken away from the first part of the calculation so that Universal Credit is tapered by any income that the customer has.

Think how cheap this would be! Although, ideally, some IT tinkering would be needed, most local authorities could, at a push, already run this scheme without any IT amendments. Probably, it could be put into place by statutory instruments, without the need for a bill.

Furthermore, local authorities already have the ability to allow the “rent part” of the Universal Credit to be calculated correctly, and paid to the landlord (if this is what the Government wants – see my other article for discussion on this point). Rent is often the largest part of a customer’s benefits apple cart, therefore it is crucial that this part of the Universal Credit is got right.

It seems ludicrous to ignore this option, especially in this financial crisis.

Jim Arnold 24/11/10