Ministers told to expect backlash as millions lose out from universal credit

Ministers will face a backlash against reform to the benefits system when millions of claimants moving on to universal credit realise their income will be cut, the government’s most senior welfare adviser has warned.

Paul Gray, chairman of the independent social security advisory committee, said that the decision to take a “substantial chunk” of funding out of the budget for universal credit risked undermining the good intentions of the reform. In 2015 his committee forced the then chancellor George Osborne to rethink and eventually ditch £4bn-worth of cuts to the tax credits system but the cuts to the universal credit budget remained.

Speaking to the Observer, Gray said the aim of universal credit – to simplify the system and encourage people back into work – was right, but he warned that building in significant budget cuts would become an issue once claimants realised they would be losing out.

What is universal credit?

Universal credit is the supposed flagship reform of the benefits system, rolling together six benefits (including unemployment benefit, tax credits and housing benefit) into one, online-only system. The theoretical aim, for which there was general support across the political spectrum, was to simplify the benefits system and increase the incentives for people to work, rather than stay on benefits.

How long has it been around?

The project was legislated for in 2011 under the auspices of its most vocal champion, Iain Duncan Smith. The plan was to roll it out by 2017. However, a series of management failures, expensive IT blunders and design faults have seen it fall at least five years behind schedule.

What is the biggest problem?

The original design set out a minimum 42-day wait for a first payment to claimants when they moved to universal credit (in practice this is often up to 60 days). After sustained pressure, the government announced in the autumn 2017 budget that the wait would be reduced to 35 days from February 2018. This will partially mitigate the impact on many claimants of having no income for six weeks. The wait has led to rent arrears (and in some cases to eviction), hunger (food banks in universal credit areas report notable increases in referrals), use of expensive credit and mental distress.

Ministers have expanded the availability of hardship loans (now repayable over a year) to help new claimants while they wait for payment. And housing benefit will now continue for an extra two weeks after the start of a universal credit claim. However, critics say the five-week waiting time is not enough and want it reduced to two or three weeks.

Are there other problems?

Plenty. Multibillion-pound cuts to work allowances imposed by the former chancellor George Osborne mean universal credit is far less generous than originally envisaged. According to the Resolution Foundation thinktank, about 2.5m low-income working households will be more than £1,000 a year worse off when they move on to universal credit, reducing work incentives. Landlords are worried that the level of rent arrears racked up by tenants on universal credit could lead to a rise in evictions. It's also not very user-friendly: claimants complain the system is complex, unreliable and difficult to manage, particularly if you have no internet access.

“As part of the austerity programme, the last government decided it was going to take a substantial chunk out of the welfare budget,” he said. “But this will now be seen as a problem with universal credit, not a more generic issue about reducing the cost of the welfare system. That poses a significant challenge once those receiving tax credits start to migrate in serious numbers over to universal credit. Although there will be transitional protection, once a claimant’s circumstances change, a lot of people are going to realise that, because the system was modified by the austerity measures, it is now going to be financially disadvantageous to them. That is a really big challenge to come, which maybe there is not huge awareness about.

“It is a problem that a major change in the system is being introduced which will mean there are substantially more losers than gainers. Any government has got to say, if they want to offset that, where are we going to find £3bn or £4bn from? Are we going to spend less in other areas, are we going to raise taxes, or are we going to borrow more? That is a high-level political position that I don’t think a detailed scrutiny committee like mine should take a view on, or get into a campaigning position on. But it is our job to point out the consequences.”

According to the Resolution Foundation thinktank, the universal credit system will result in gains for 2.2 million working families, with an average increase in income of £41 a week. However, 3.2 million working families are expected to be worse off, with an average loss of £48 a week. About 600,000 of those who lose out, mainly couples with children, will no longer be entitled to help at all.

Gray also said there was an unfairness in the treatment of the self-employed after concerns that universal credit would lead to some ending up thousands of pounds worse off compared to an employee with the same annual earnings. The problem has emerged because of the way self-employed earnings are recorded under universal credit. A “minimum income floor” is used to calculate universal credit payments each month. Because self-employed workers’ earnings fluctuate from month to month, they sometimes fail to meet the minimum figure and lose out.

“There is a problem,” Gray said. “For the first time, we are getting serious numbers of self-employed people into the benefits system. Let’s not overlook the fact this is very difficult.

“The government has got to build in some kind of protection that means the social security system isn’t getting ripped off. My concern is that the way the parameters have been drawn at the moment means that the risk is the balance has tipped too far the other way … There is a risk that will be a disincentive to the whole entrepreneurial culture that this government and most governments are going to want to encourage.”

A spokeswoman for the Department for Work and Pensions said it was “simplistic to compare universal credit to the complex legacy benefit system”.

“Universal credit clearly shows that people are better off in work, and we know this is the best route out of poverty,” she said. “It has always been the case that when there is a change in an individual’s circumstances, their benefit entitlement may change. We are sensitive to these changes and that is why HMRC and DWP are working closely to design the best possible journey for people moving to the new system.”

In response to concern about the self-employed, she said it would not be right for the system to prop up businesses that are not viable. “That’s why, after the initial year, gainfully self-employed people are treated as if they are earning as much as working on the minimum wage,” she said. “If they are not, and they want to maintain the same level of income, they will be expected to increase their earnings rather than relying on their UC payment.”