Universal Credit’s £20-a-week increase: a looming headache for the chancellor

It can be tough being the chancellor. As the second big wave of coronavirus appears to be peaking Rishi Sunak will, inevitably, have to think about how and when (though clearly not yet) to wind down the various multi-billion support schemes put in place to help people financially through the pandemic.

His most pressing issue is the £20 a week, or £1,040 a year, increase that was put into Universal Credit as a “temporary” measure. It is due to expire in April, a year after it was introduced, but pressure to retain it is building almost everywhere, not least on the Conservative back benches. And, as the historians in the Treasury will know, measures billed as temporary can be mighty hard to get rid of.

Ghosts of Christmas past haunt Sunak's UC dilemma

Perhaps the most extreme example is the £10 Christmas Bonus for pensioners. Introduced in 1972 as a “temporary” measure to partially compensate for high inflation, it was a real lump of money at a time when the basic pension was just £6.75 a week. It has never been uprated, but neither has any chancellor felt able to get rid of it. Had it been uprated merely by inflation, and the basic pension has risen by more than inflation over the years, it would be worth around £135 today.

Sunak’s dilemma is real. Like so many of the government’s financial interventions made in response to the pandemic, Universal Credit’s £20 a week increase did not come cheap – at an initial cost of £6.6 billion that will inevitably rise as the number of claimants continue to increase. That number is currently close to six million, almost double the pre-pandemic figure. And it is clear that the money has made a real difference to some of the least well off in society, taking the standard allowance in UC for a single adult aged over 25 up from around £74.50 a week to £94.50.

Universal Credit’s £20 increase is commendable but poorly targeted

Introduced with commendable speed, and done at a flat rate to allow that to happen, the £20 increase is however, not well targeted. It gives the same to single people and the childless as it does to families with children – and child poverty, both in and out of work, has been a growing concern. In other words, in percentage terms, it gives most to those who would normally get least from the social security system and its scale is such that, as the Institute for Fiscal Studies has pointed out ^[1], for a single childless non-disabled adult aged over 25 the increase is bigger than the entire real terms rise in their benefit over the past 45 years.

What it has also done, however, is highlight just how low out-of-work benefit rates have become over the years. On average, as the IFS has also recently underlined, the UK’s flat rate benefits are much less generous to the newly unemployed than in most other OECD countries, 36 in all, where benefits more typically are earnings related.

These trends provide a strong case for retaining the value of the increase. The government should review the level of support provided through Universal Credit in the context of its objectives for reducing poverty, which may include, over time, changing the way any additional money is distributed. For example, to maintain work incentives as the economy recovers, the work allowances in Universal Credit – the amount people can earn before benefit starts to be withdrawn – could be increased. Alternatively, the ‘taper’ – the rate at which benefit is withdrawn as earnings rise – could be reduced. At present, benefit is reduced by 63 pence for each extra pound earned, which is a pretty punitive rate of marginal taxation.

Or, if child poverty is the central target, stronger incentives for the second earner in a family to take a job could be introduced – not least because two-earner families with children are less likely to be defined as being in poverty than single earner families. There are, of course, plenty of other choices.

Hard politics may make the temporary permanent

None, however, will be remotely easy politically as each would involve taking something away from those who now receive it. As past chancellors have found, that cannot always be done – George Osborne, for example, was forced into retreat in 2015 when he tried to make significant cuts to tax credits. A decision will be needed soon – April is not far away – and this is a genuinely knotty problem for the chancellor. The temporary, even with its less than perfect distribution, may yet become permanent.

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