20 August 2021

Keeping the £20 Universal Credit uplift is neither cost-effective nor compassionate


Predictably, an increasing number of politicians, charities and campaign groups are again calling for the Government to cancel the planned ‘cut’ to Universal Credit (UC) scheduled for September. When the pandemic hit, the Chancellor announced a temporary increase in the UC standard allowance of £20 per week for one year – later extended by a further six months. Voices from both left and right have been putting forward a host of different reasons why this simply must be made a permanent increase, which would add £6-7bn to the annual welfare bill.

One favourite argument, wheeled out a few weeks ago in the New Statesman, is that the UK has incredibly low ‘replacement rates’ by international standards. In other words, when someone in the UK loses their job, the benefits they are entitled to account for much less of their previous income than is the case in most countries. The New Statesman quote figures of 14% in the UK (or 18% with the £20 uplift), compared to 90% in Denmark, 75% in Italy, 60% in Germany, and so on. But there is more to this comparison than is revealed by the headline figures. 

For most European countries, unemployment benefits operate either on a contributory basis or through private unemployment insurance funds. If you lose your job, you can receive a certain percentage of your previous salary (often capped for the highest paid) for a limited period. That’s why, for example, the replacement rate usually given for Germany is 60%. That is only available to most people for one year, if you’ve got at least two years of contribution under your belt. If you’ve not worked, or you’re unemployed for more than a year, the means-tested support available to you is of a similar level of generosity to UC in this country.

The nature of the UK’s system means that our replacement rate is usually calculated by looking at someone’s UC entitlement as a percentage of average earnings. Our system is heavily means-tested and doesn’t take into account your previous wage, so the figure for the average replacement rate is skewed by those on higher incomes who rarely need to fall back on the welfare safety net but would see a very big drop in their income if they did. That means that the replacement rate is actually much higher for lower earners if they lose their job.

There is a genuine issue here, but it’s not solved by a £20 increase in the standard allowance. Our system is unusual in how little it takes into account an individual’s past record of working and contributing to the system. Not only does this pose policy problems when millions suddenly find themselves without jobs, but it also undermines public confidence in the welfare system. That has been clear from the findings of a major research project we’ve been conducting at the Centre for Policy Studies, including polling and focus groups, due to be published in full soon. 

Another common argument used to justify keeping the uplift is that many claimants do have jobs. Whenever a minister talks about removing the uplift as part of a shift towards focusing on employment, there’s a boring cliché among a certain section of the commentariat of going ‘err, you clearly don’t know that lots of people on Universal Credit are actually in work’. That’s true, but it doesn’t mean that the uplift supports employment. If campaigners want to help struggling working families on low pay, there are simple and well-known mechanisms for doing this much more effectively than a blanket uplift to the UC standard allowance. Increasing work allowances or cutting the taper rate would mean working claimants keep more of the money they earn. Not only does that increase their overall income, it improves the incentives in the system by increasing the rewards for getting a new job, upping your hours, or taking a promotion. 

There’s also been a lot of chatter about child poverty. Various numbers have been floating around about how many children will be plunged into poverty if the uplift is removed. It’s certainly true that many households claiming UC are families with children. Again, however, if campaigners are serious about their child poverty concerns, how is an indiscriminate £20 uplift the best policy? Why not campaign for higher child allowances, or renew calls to end the two-child limit? They are supporting a policy which gives every claimant household £20 a week, whether they’re a single childless person living with mum and dad, or a couple with three kids to feed. Hardly the optimum use of resources if you’re trying to tackle child poverty.

In the current circumstances, the Treasury is (rightly) going to be very careful to ensure that it avoids unnecessary spending, and that when it does spend, it does so wisely. Yes, there are arguments to be made for a more generous welfare safety net – but making the £20 uplift permanent would be less cost effective, and less compassionate, than many of the alternatives. If we’re not even going to consider those alternatives, we may miss a golden opportunity to change the system for the better.

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James Heywood is Head of Welfare and Opportunity at the Centre for Policy Studies.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.