Budget 2021: Universal Credit winners and losers

From the moment the chancellor introduced the “temporary” £20-a-week, or £1,040-a-year, uplift to Universal Credit at the start of the pandemic, the challenge was always going to be how to get rid of it. But get rid of it the chancellor has – to serious misgivings and indeed appreciable opposition from the Conservative backbenches, as well as from charities and others who make the case for the least well off.

Temporary measures, lasting headaches

As the Treasury knows all too well, temporary measures can be mighty hard to remove, and indeed what was originally planned as an increase for 12 months ended up running for 18. The £20 a week clearly made a big difference. It was introduced at commendable speed and with maximum simplicity in the face of the pandemic. But the price from that was that it was not well targeted. It gave the same to single people and childless couples as to those with children (child poverty, whether parents are in or out of work, has been a growing concern in recent years).

In percentage terms the uplift gave most to those who would normally get least from the benefit system. Its scale was such that, as the Institute for Fiscal Studies (IFS) has pointed out,[1] for a single childless non-disabled adult aged over 25 the increase was bigger than the entire real-terms rise in their benefit over the past 45 years. It cost something over £6bn a year – and removing it, of course, duly produced the biggest single cut in benefit rates over the same period. Unsurprisingly this sparked controversy, and piled pressure on the Treasury in the leadup to what it has been keen to describe as its first “post-Covid” budget.

The changes reward working claimants…

Having got rid of it, however, the chancellor in Wednesday’s budget has given around a third of that back in measures that will still backbench opposition but also bring a real and lasting improvement for the 40% or so of Universal Credit claimants who are in work. The latter point, and particularly the scale of the improvements contained within the measures, is worth registering and should be commended – though that will be cold comfort for those out of work, who are losing the £20 a week at a time when inflation is on the rise.

The measures involve an increase of £500 a year in the amount that households with children can keep before the benefit starts to be withdrawn, with the same applying where a household member has limited capability for work. In addition there is a big cut in the so-called ‘taper rate’ – the rate at which the benefit is withdrawn as earnings rise – from the current 63% to 55% (the level, incidentally, that Iain Duncan Smith originally wanted when Universal Credit was being devised).

This means that claimants will retain an additional 8p for each extra pound they earn while on Universal Credit and, thanks to the digital nature of Universal Credit, these changes will come in from 1 December. Combined with the 6.6% increase to £9.50 from next April in the minimum wage, that means that a lone parent working full time will be some £1,200 a year better off, with smaller but proportional gains for those working part time. The cost of these measures will be £2.2bn next year rising to a forecast £2.75bn in 2025/26. A lot less than the £6bn, but still significant sums.

But leave most claimants facing a hard winter

The message is clear. The government wants to reward work, and has given Universal Credit a significant tweak to help do that. It is providing a measure of protection for those in work from the end of the £20 uplift and a goodly measure for those in full-time minimum-wage work. For the four million or so workless families on Universal Credit (the majority), there is, as the IFS has put it, “no respite”.[2] They lose the £1,040-a-year uplift while facing, like everyone else, rising inflation that includes soaring heating bills.

At a time when benefit rates for this group are appreciably lower than in 2010, thanks to austerity-era cuts, the autumn budget has set the scene for a hard winter.

[1] Bourquin P et al, IFS Green Budget 2020, IFS, October 2020, www.ifs.org.uk/publications/15074

[2] Xu X, Living Standards, IFS, October 2020, https://ifs.org.uk/uploads/Autumn-Budget-2021-Living-Standards-by-Xiaowei-Xu.pdf