One of the UK’s leading thinktanks has criticised Rishi Sunak’s plans for an abrupt end to the £20 a week increase in universal credit, calling the decision not to phase out the uplift “remarkable”.
In its post-budget analysis, the Institute for Fiscal Studies contrasted the way in which the furlough, stamp duty holiday, the cut in VAT and business rates support were being phased out, with the cliff-edge for universal credit (UC) in September.
Paul Johnson, the IFS’s director, said pressure would mount to maintain the £20 a week increase, even though it would cost the Treasury £6bn a year.
“It is, by the way, remarkable that while the chancellor felt the need for a gradual phase out of furlough, business rates support, stamp duty reductions and VAT reductions he is still set on a cliff-edge reduction in UC such that incomes of some of the poorest families will fall by over £80 between one month and the next. Whatever the case for cutting generosity into the longer term, if you’re going to do so the case for doing it gradually rather than all at once looks unanswerable.”
Johnson said Sunak’s package was a “tale of two budgets”, with £65bn of immediate support for the economy followed by nearly £50bn of tax increases and spending cuts.
The IFS director said the chancellor would struggle to make the savings he is planning and doubted whether the jump in corporation tax from 19% to 25% – the biggest revenue raising measure in the budget – would deliver the £17bn expected.
“I may be proved wrong, but I’d offer 10 to 1 against that happening,” Johnson said.
The increase in corporation tax and the freezing of tax allowances were both “screeching U-turns” on Conservative policy over the past decade, Johnson added.
Sunak plans involve covering the day-to-day spending of government with tax receipts by the middle of the decade, with the state only borrowing for investment.
“The sad truth is that that would be a balance built on the highest sustained tax burden in UK history and yet further cuts in unprotected public service spending,” Johnson said. “That is perhaps one measure of the difficulties presented by more than a decade of paltry growth followed by the deepest recession in history.”
The IFS director said he doubted whether Sunak’s spending plans would be adhered to.
“Are we really going to spend £16bn less on public services than we were planning pre-pandemic? Is the NHS really going to revert to its pre-Covid spending plans after April 2022?
“In reality, there will be pressures from all sorts of directions. The NHS is perhaps the most obvious. Further top-ups seem near-inevitable. Catching up on lost learning in schools, dealing with the backlog in our courts system, supporting public transport providers, and fixing our system for social care funding would all require additional spending. The chancellor’s medium-term spending plans simply look implausibly low.”
Johnson said the chancellor was providing a big fiscal – tax and spending – stimulus to the economy over the next two years.
What is universal credit?
Universal credit (UC) is the supposed flagship reform of the benefits system, rolling together six benefits into one, online-only system. The theoretical aim, for which there was general support across the political spectrum, was to simplify the system and increase the incentives for people to move off benefits into work. With a huge influx due to the economic impact of the coronavirus, in September 2020 there were 5.6 million people claiming UC.
How long has it been around?
The project was legislated for in 2011 under the auspices of its most vocal champion, Conservative MP Iain Duncan Smith. The plan was to roll it out by 2017. However, a series of management failures, expensive IT blunders and design faults mean it is now seven years behind schedule, and full rollout will not be complete until 2024. The government admitted that the delay was caused in part by claimants being too scared to sign up to the new benefit.
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 UC (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 evictions, hunger (food banks in UC 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. Housing benefit will now continue for an extra two weeks after the start of a UC claim. However, critics say the five-week wait is still too long 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 UC 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 to UC, reducing work incentives.
Landlords are worried that the level of rent arrears accrued by tenants on UC 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.
And there is concern that UC cannot deliver key promises: a critical study found it does not deliver savings, cannot prove it gets more people into work, and has plunged vulnerable claimants into hardship.
“We have that support to thank for the now remarkably modest Office for Budget Responsibility forecasts of unemployment. If it really does peak at “only” 6.5% we, and Sunak, can consider that a remarkable triumph.”
