REPORT Making the most of UC Final report of the Resolution Foundation review of Universal Credit David Finch June 2015 resolutionfoundation.org [email protected] +44 (0)203 372 2960 @resfoundation Making the most of UC: Final report of the Resolution Foundation review of Universal Credit Acknowledgements 2 Acknowledgements The panel would like to thank the wide range of experts who have shared their expertise at various times throughout the project, including Sir John Hills, Sue Royston, Lindsay Judge, Caroline Davey, Tony Wilson, Rowan Foster, Katie Schmuecker, Fran Bennett and Susan Himmelweit and Ellen Broome, Adam Butler and Jill Rutter. We are grateful for conversations with officials at HM Treasury, the Department for Work and Pensions, the Greater London Authority and National Audit Office, representatives from Equity, seminars held by LITRG and the Social Security Committee and the opportunity to visit Newham Workplace. We would also like to like to thank all of those who attended a roundtable to discuss our early ideas in September 2014. This publication is available in the Welfare & Tax Reform section of our website @resfoundation Making the most of UC: Final report of the Resolution Foundation review of Universal Credit Contents 3 Contents Executive Summary ���������������������������������������������������������������������������������7 Section 1 An overview of UC ��������������������������������������������������������������������������������25 Section 2 The principles and trade-offs of welfare reform �����������������������������������29 Section 3 Weighing up the current proposals �������������������������������������������������������38 Section 4 Getting into work – incentives to start working �����������������������������������49 Section 5 Getting on at work – progression under UC �����������������������������������������65 Section 6 What’s in and what’s out – the coverage of UC ������������������������������������74 Section 7 A user-friendly system – interacting with UC ����������������������������������������90 Section 8 Phase I – A package for this parliament ����������������������������������������������102 Section 9 Phase II – UC in the next decade �������������������������������������������������������115 Section 10 Conclusion ������������������������������������������������������������������������������������������127 Annex A: The evolving design of UC �������������������������������������������������129 Annex B: Free school meal work allowances ���������������������������������������131 Annex C: Treatment of unearned income �������������������������������������������133 Annex D: Rebalancing incentives to enter work ���������������������������������134 This publication is available in the Welfare & Tax Reform section of our website @resfoundation Making the most of UC: Final report of the Resolution Foundation review of Universal Credit Contents 4 Expert Panel Vidhya Alakeson (co-chair), Chief Executive of The Power to Change, formerly Deputy Chief Executive of Resolution Foundation Professor Mike Brewer, Professor of Economics and Director of the ESRC Research Centre on Micro-social Change at the University of Essex Professor Paul Gregg, Professor of Economic and Social Policy, and Director of the Centre for Analysis and Social Policy at the University of Bath Grainia Long, Chief Executive at the Irish Society for the Prevention of Cruelty to Children and formerly Chief Executive of the Chartered Institute of Housing Gavin Smart, Deputy Chief Executive of the Chartered Institute of Housing Dr Jim McCormick, Scotland adviser to the Joseph Rowntree Foundation, member of the Social Security Advisory Committee Ian Mulheirn, Director of Consulting for Oxford Economics Emma Stewart MBE, Director of Timewise Foundation Nick Timmins (chair), public policy expert and historian of the welfare state Giles Wilkes, Financial Times leader writer and former adviser to Vince Cable This publication is available in the Welfare & Tax Reform section of our website @resfoundation Making the most of UC: Final report of the Resolution Foundation review of Universal Credit Contents 5 Chairs’ Foreword Universal Credit is one of the biggest, boldest and riskiest of the changes that the last coalition government undertook. For much of its life it has looked like a rudderless tanker heading for the rocks. It remains a monumental challenge for the newly-elected government. Its intentions are, however, entirely honourable. In principle it should attract support from across the political spectrum. The honourable intentions are both to simplify a horrendously complicated benefit system and to ensure that, in almost all conceivable circumstances, entering work, and getting on once in a job, pays. UC is non-partisan in the sense that what used to be termed the UK’s ‘three main political parties’ are, at least at a headline level, signed up to that agenda. Indeed the last Labour government repeatedly explored, with an enthusiasm that varied over time, the idea of a single working-age benefit. At its core, that is what UC is. That doesn’t mean that there aren’t fundamental policy choices involved in its design – with the choices having major distributional consequences. Cross-party support doesn’t mean an absence of small ‘p’ political issues. As in any benefit system, UC must balance key trade-offs between the total cost of the system, the level of support for families with the lowest incomes and the strength of incentives to start, and then progress, in work. There are also questions of scope – both in terms of coverage and ambition. Should this single working-age benefit be literally what it sounds like on the tin – a credit that embraces all or almost all benefits, both in and out of work – or are some payments better left outside the system? And how far can it, or should it, seek to address emerging trends in the labour market and wider pressures on the cost of living, such as housing and childcare? The 2010 coalition provided answers to these and other questions. But the answers were formed in the early part of last parliament (and indeed by thinking done in the previous one), with government focused on recovery after the downturn. In setting up this expert panel, the Resolution Foundation took the view that – by the time of its publication, five years on – changing economic conditions warranted a fresh look at UC. There is an opportunity, with a new government, to pause and consider how well placed it is to meet the challenges that the UK’s working-age welfare system will face over the coming decade. At the time the panel was established, there was a real risk that UC would founder on the rocks. Indeed there remains a risk that could still happen – that, at scale, it will prove to be un-imple- mentable. The chances of that, however, appear to be diminishing, even if the timetable for full implementation is likely to extend beyond the end of this decade. To review where UC has got to, and how its course might be altered, the Foundation assembled an impressive panel of independent-minded experts that the two of us have chaired. Outside the Department for Work and Pensions (DWP) and the Treasury, few people can know more about the issues – in terms of both the macro questions as well as some of the more granular challenges associated with welfare reform and the micro practicalities of benefit design and delivery. The pages that follow do not set out a utopian UC, designed in academic isolation. Nor do they start from a blank-sheet of paper in terms of the long-term future of our social security system. Rather, they take as their starting point the proposals put forward by the last government on UC. And they are grounded in an acknowledgement of the realities of today’s public finances (though they don’t wed themselves to any one party’s views of necessary fiscal consolidation). This publication is available in the Welfare & Tax Reform section of our website @resfoundation Making the most of UC: Final report of the Resolution Foundation review of Universal Credit Contents 6 Nonetheless, in our view they represent a package of reforms that: » strike a better balance between inevitably competing objectives, » speak to the reality of the UK’s evolving jobs market and the changing nature of household working patterns, and » are more likely to fulfil the underlying goals that lay behind UC in the first place. In coming up with its recommendations the panel has identified savings, prioritised, proposed experimentation where necessary and made some difficult trade-offs between competing objectives. None of the recommendations are likely to be entirely uncontroversial – few benefit changes are. But we hope and believe they chart a course to a better version of welfare reform. They also seek to elevate the crucial policy choices that underpin UC – choices which all too often have been lost to sight amid the media focus on missed deadlines and troublesome IT contracts. Our aim has been to produce – within the constraints that exist – the best outcome for those who really matter: the millions who are set to depend upon UC and the taxpayers who fund it. Many of them, of course, being the same people. Nick Timmins and Vidhya Alakeson This publication is available in the Welfare & Tax Reform section of our website @resfoundation Making the most of UC: Final report of the Resolution Foundation review of Universal Credit Executive Summary 7 Executive Summary At some point in their lives, almost everyone in the UK will receive financial