Although the new Work and Pensions Secretary has stopped cuts to disability benefits he seems to be in lock-step with his predecessor in worrying that the benefit system “locks people into workless-ness”. This is focusing on the wrong issue. The most pressing problem in reducing poverty and inequality at the moment isn’t the need to reduce workless households. The majority of children in households in poverty have someone who works in them. In fact, 64% of children in poverty live in a household where someone works. Furthermore, over a third of households with children in poverty are meeting the government’s expectations of work and yet are still stuck in poverty.
However, you wouldn’t know this from looking at the Government’s main welfare reform. Universal Credit’s main purpose is to make it easier for a household with no-one working to enter work, by removing the administrative hassle of applying for tax credits when entering work, and increasing the reward for working a small number of hours on low pay. The Government’s initial evaluation of Universal Credit shows it is generally successful at doing that. People on Universal Credit are more likely to enter work, but this work is “relatively few hours at relatively low wages”.
Part of the problem with Universal Credit is that the people who receive it keep very little of any extra money they earn if they increase their earnings. Analysis published today from the Resolution Foundation shows that 70% of people on UC will keep less than 25p for every £1 that their earnings increase by. Whilst Universal Credit makes this problem slightly worse, it is not by any means a new problem. Forty eight per cent of households under the current system keep less than 25p for every £1 their earnings increase. Eighty six per cent keep less than 30p for every £1 their earnings increase (under both Universal Credit and the current system).
Cast your mind back to 2010 when politicians were arguing about the 50p rate of tax on the top 1% of taxpayers. Wealthy individuals complained that losing half their income would sap aspiration and reduce the incentive for them to be more productive and grow the economy. Imagine the outcry if that was raised to 70p or 75p as many of the poorest households face. This is the real aspiration tax.
Our research has shown that this is deeply unpopular with the public. Seventy per cent of the public believe that working parents on Universal Credit should keep more of what they earn. When asked people believed that those on low incomes should keep 75p of every £1 that they earn, rather than keeping 25p as they currently do.
If the Government is serious about tackling poverty and inequality then it needs to focus on pay and progression. The best way for it to start would be by lowering the withdrawal rate of Universal Credit so that households with low incomes keep more of what they earn.
Tim Stacey, Senior Policy and Research Advisor