Economic Affairs Committee report on universal credit

James Goddard

On 23 March 2022, the House of Lords is due to debate a report from the House of Lords Economic Affairs Committee (EAC) entitled ‘Universal Credit isn’t Working: Proposals for Reform’, published on 31 July 2020.

Universal credit (UC) was introduced in 2013, through the Welfare Reform Act 2012. It replaced six ‘legacy benefits’ with a single benefit payment, paid to claimants monthly in arrears. The first payment is made after five weeks. It is intended as both a safety net for those who are unemployed or unable to work, and an in-work benefit for those on low incomes. The number of UC claimants increased significantly during the coronavirus pandemic. There were 5.6 million people on UC as at January 2022.

Committee report

The EAC’s report concluded that the original aims and objectives of UC remained “broadly correct”. It did not recommend replacing UC with a new system, not least because of the “severe disruption” this would cause to the system’s users. However, the committee said UC required “substantial reform” as its current design was “harming many, particularly the most vulnerable”. The committee said it was responsible for causing “soaring food bank usage” and “dramatic increases in rent arrears”. Without reform, the committee was concerned that UC would “fail to meet the basic requirement of a social security system: the provision of a dependable safety net”.

The committee identified three main areas in which it made recommendations for UC reform:

design and implementation;
adequacy of awards; and
support provided to claimants to navigate the system and find work.

Some of the key recommendations made by the committee in these areas are summarised below.

Design and implementation

The committee said the five-week wait for the first payment was the “main cause of insecurity” for claimants. It said the wait “entrenches debt, increases extreme poverty and harms vulnerable groups”. To mitigate some of these issues, the committee recommended that the Government should introduce a non-repayable, two-week initial grant for all claimants.

The committee also observed that calculating payments based on a ‘monthly assessment period’ resulted in “substantial fluctuations” in claimants’ income and made it “extremely difficult for claimants to budget”. It said the Government should fix the level of awards for three months. It added that paying UC claimants monthly, although intended to mimic the world of work, did not “reflect the lived experience” of the way many claimants budgeted. It therefore recommended that claimants should be able to choose to receive UC twice a month or monthly.

Adequacy of awards

In March 2020, at the start of the coronavirus pandemic, the Government increased the UC standard allowance by £1,000, or around £20 a week. The committee recommended that the uplift should be made permanent.

The committee noted that UC was being used as a means of collecting other debt from recipients, including “£6 billion of historic tax credit debt”. It said many claimants were unaware of this debt and that the Government should write off historic tax credit debt.

The committee said that all claimants should receive a work allowance (the amount they are allowed to earn each month before their UC is reduced by the taper rate). It argued the work allowance should be increased and the taper rate reduced from 63%, the figure it was set at when the committee published its report. The taper rate means that for every £1 earned by a claimant over their work allowance, their UC award is reduced by 63p.

Support for claimants

UC claimants are subject to a range of ‘conditionality requirements’, such as requirements to prepare for work, search for job vacancies and accept job offers. If they do not meet the requirements, they can be sanctioned by having their UC reduced or stopped altogether. The committee said the UK had “some of the most punitive [benefits] sanctions in the world”, but that there was limited evidence they were effective. The committee found evidence that removing claimants’ main source of income increased debt, poverty, and foodbank use, and was harmful to claimants’ mental health. The committee recommended that UC conditionality requirements should be rebalanced, with “less emphasis placed on obligations and sanctions”.

The committee added that the Government should provide more support to claimants to find work, and to civil society organisations that help claimants navigate the benefits system.

Government response

The Government published a response to the committee’s report on 13 October 2020. It said it was “surprised” by several of the committee’s recommendations, as the effectiveness of UC had been “admirably demonstrated” in response to the coronavirus pandemic. The Government said it takes the “support and financial security of vulnerable people extremely seriously”. It added this was evidenced by the implementation of a package of “temporary and permanent” welfare measures during the pandemic that totalled over £9 billion. The Government rejected most of the committee’s recommendations.

On the payment of a two-week grant to new claimants, the Government rejected the committee’s recommendation. It said there was already support for new claimants in need, who could receive an advance payment in some circumstances, which would then be repaid. The Government did not believe a grant should be paid by default, as it would “call into question the balance between support for those on benefits and the taxpayer”. It also said a non-repayable grant could be a “significant fraud risk”, as this could encourage fraudulent claims.

The Government rejected the recommendations that claimants’ level of award should be fixed for three months at a time and that claimants should be able to choose to be paid twice a month. The Government said the assessment periods and payment structure were “fundamental parts” of UC, designed to mirror the world of work, and they could not be adapted “without a complete overhaul of the system”. The Government said the committee effectively wanted to “lock in payments with a quarterly review”. It added this was “one of the key failures of the Labour Government’s tax credit” system, which it argued had caused some claimants to get into debt.

On the issue of writing off historic tax credit debt, the Government acknowledged the “impact on claimants moving from one benefit to another”. The Government did not commit to write off the debt but said it would continue to review “how to better manage this”.

On making the £20 a week uplift permanent, the Government said it would keep this under review with the Treasury. The Government has subsequently abolished the uplift (see below).

The Government also did not commit to increase the work allowance, but said it was “regularly reviewed”. The Government added that it “understood the sentiment” of the committee’s recommendation on reducing the taper rate, but it could not commit to this as it needed to “balance how it uses taxpayer money”. The Government has subsequently made changes to the work allowance and the taper rate (see below).

On the UC sanctions regime, the Government did not agree that it needed rebalancing. It said sanctions could be a useful way to “encourage claimants to comply with reasonable and achievable requirements”. The Government also said that if the amount by which sanctioned claimants had their awards reduced was lowered, or if it was “tailored to their affordability”, the sanction could become “ineffective as a deterrent”.

In a follow-up letter dated 16 October 2020, chair of the committee Lord Forsyth of Drumlean wrote to Secretary of State for Work and Pensions Thérèse Coffey to express surprise that her department “was only able to provide perfunctory replies to some of our most urgent recommendations”. He requested “more detail” on the department’s discussions with the Treasury and invited Dr Coffey to give evidence.

Responding later that month, Dr Coffey wrote that she hoped Lord Forsyth would “understand that fiscal discussions between the department and HM Treasury are not repeated in public, whether that be on the future of benefits or on policies regarding tax credit debt”.

Will Quince, a Parliamentary Under Secretary of State at the Department for Work and Pensions, subsequently gave evidence to a joint meeting of the EAC and the House of Commons Work and Pensions Committee in March 2021.

Recent developments

The Government has made several changes to UC since it published its response to the committee’s report.

In the March 2021 budget, the Government announced that the £20 a week uplift to the UC standard allowance, which had been introduced in March 2020, would be extended for a further six months. This was then abolished with effect from October 2021. The decision was criticised for reducing UC recipients’ incomes by over £1,000 a year at a time of increasing cost of living pressures.

Also in the March 2021 budget, the Government announced that the maximum rate at which deductions could be made to UC allowances (for recovery of debts and overpayments, including historic tax credit debt) would be reduced from 30% to 25%. This would be implemented from April 2021 and not October 2021 as previously planned.

In the autumn budget and spending review in October 2021, Chancellor of the Exchequer Rishi Sunak announced that the UC work allowance would be increased by £500 and the taper rate would be reduced from 63% to 55%. The Government said this was “an effective tax cut for low income working households in receipt of UC worth £2.2 billion in 2022/23”, which would “ensure that work always pays”.

In February 2022, the Government announced the Way to Work scheme. This aimed to get 500,000 people “off universal credit and into work”, as part of the economic recovery from the pandemic. The Government claimed that job vacancies are “at a record high”, and that the scheme would “support people back into work faster than ever before”.

The scheme involves reducing the time in which UC claimants must find and accept work in their previous or preferred job sector, from three months to four weeks. If claimants have not found work in their preferred sector in four weeks, they could face sanctions unless they widen their job search.

The Government has also said that in 2022 it intends to restart the policy of ‘managed migration’, which involves moving claimants of legacy benefits onto universal credit despite no change in their circumstances. Pilot schemes of managed migration started in 2019, but were suspended in 2020 at the start of the pandemic. The House of Commons Work and Pensions Committee has said that the groups of people involved in managed migration often include people with “complex needs”, including the severely disabled, those with chronic health conditions, and the long-term unemployed.