Coronavirus should trigger long-term reforms to Universal Credit

Unlike the House of Lords Economic Affairs Committee’s Universal Credit (UC) report in July, which must have left ministers feeling they had been hit by a blunderbuss, the a new report from the Commons Work and Pensions Select Committee report reads more like a well-aimed set of rifle shots: making recommendations that the government could – indeed should – accept.

The chancellor should make temporary changes to Universal Credit permanent

The report focuses on UC’s biggest single problem – the five-week wait for the first payment when transitioning to UC. But it goes beyond that, examining other issues, including the thorny one of the re-payment of debt within UC.

The most important of these is that the “temporary” increase in the housing element of UC, and the equally “temporary” addition of £20 a week, or £1,040 a year, in the personal allowance – measures taken to mitigate the impact of Covid-19 on the least well off – should become permanent. Increasing the housing element was a change long needed, given that the rents those on UC can afford had become increasingly detached from the rents they have to pay. The increase in the cash payment followed four years of benefit freeze preceded by three years of only a 1% increase annually. Benefit rates for those out of work, particularly for those without children, had become historically low.

The chancellor is already facing a growing groundswell of opinion, including from some Conservative backbenchers, that these “temporary” changes need to become more permanent – a view to which the cross-party committee has now added its voice.

At around £7 billion a year currently, these measures are costly – and the bill will rise if the end of the furlough scheme produces another surge in claims for UC.

In the longer run, as the Institute for Fiscal Studies suggested in its green budget last week, there could be a case for shifting some of the cash increase into other parts of UC – improving work incentives by increasing the amounts people can earn before the benefit starts to be withdrawn, and/or reducing the rate at which it is withdrawn. Short of a miracle, however, the labour market will not, on current trends, be in a state by next April in which work incentives will be a major concern. And if the phrase “we are all in this together” is to have any meaning, running the “temporary” increase on is a demand to which the chancellor should, and almost certainly will, have to bow.

Starter payments would make the transition to Universal Credit easier

On the infamous five-week wait, the committee has bought the idea, advocated by many, that all new claims should, in its phrase, receive a non-repayable “starter payment” to help people cope with the transition. And that, indeed, was an idea advocated at the very beginning of the design of UC by Lord Freud, the minister for welfare reform, even if, in the early days of austerity, the Treasury refused to fund it.

At present those on housing benefit, Jobseeker’s Allowance and Employment and Support Allowance receive a two-week run-on of benefit, but entirely new claims and those transferring from tax credits do not. The committee’s solution is to remove these run-ons but pay everyone three weeks’ worth of the standard personal allowance, a move that would shorten the five-week wait for money and reduce the need for repayable advances – which, in the committee’s view, are in fact loans.

Of the many variants that have been suggested for some sort of “starter payment” or “welcome grant”, the committee’s proposal does have the advantage of simplicity and, as far as can be calculated in these uncertain times, a relatively limited cost. It may, however, need an amendment. Namely that to reduce the very real risk of fraud – people putting in claims for the starter payments even if their income is way above that needed to qualify for UC – these payments may have to be cast as “advances” or “loans” that then get cancelled, say three months in, once it has been clearly established that a claim is genuine. The payment to those whose claims were not genuine would then be pursued by the existing machinery.

Such a measure – a starter payment – would undoubtedly make the transition to UC easier and reduce the need for repayable advances and the financial stress that can cause.

The committee has drawn up a report it believes the government could accept

And that in turn leads to the committee to tackle the broader issue of debt in UC. In particular, the impact of debt from tax credits. Overpayments – and indeed under payments – are built into the design of tax credits. The problem is that, due to the way the system works, overpayments can be large, and individuals and families can accumulate debt without being aware that they owe it. Some of it is years old. But when they sign up or transfer to UC they discover that the Department for Work and Pensions has an extremely efficient debt-recovery machine.

The government has long recognised that repayment of such debts is having a crippling effect, and since UC has been rolling out has reduced the maximum amount that can be deducted from awards from an eye-watering 40% to 30%, and, from next October to 25%.

For those out of work, these deductions, as the committee points out, are being made from what is, in effect, the state’s definition of a subsistence income. The committee’s solution is not to write the tax credit debt off, as some have advocated, but to reduce the maximum deduction to 10% of the standard allowance, with tax credit debt only being collected once any advance has been paid off. Debts that have not been pursued for six years should be written off, the committee says: and there are precedents for writing off tax credit debt under both the last Labour government and the coalition. The proposition essentially is that the Treasury would retain hopes of getting its money back, but at a much slower rate and with a far less damaging impact on those repaying it.

Some will, undoubtedly, view these recommendations from the committee as too timid. But amid the monumental demands for extra spending that Covid-19 will produce and is producing, what this cross-party group of MPs has clearly done is seek to devise recommendations that it believes the government should not only accept – but could accept.