Families furthest below MIS excluded from social security gains

It is not easy to interpret the ups and downs of Universal Credit (UC) in 2021, which saw an inflation-based uprating in April, an unprecedented cut of £1,000 a year in October, and an increase for working families announced in the Budget and introduced last week – worth up to £1,600 to a family earning £20,000 a year after tax, but nothing to an out-of-work family.

Here is my take on what’s happening. At the start of the pandemic, Sunak saw the inadequacy of basic benefits, whose value had been eroded by the 2015-19 freeze, through the lens of people falling out of work. This led him to introduce the £1,000 uplift to ‘strengthen the safety net’. As the economy recovers, he’s ditched that mission, and returned to a rhetoric focused on the opposite direction of travel, getting people back into work. What this has meant in practice in the past six years is general cuts in benefits combined with selective improvements in rewards for work.

Hence the Budget slightly raised the earnings at which UC starts being withdrawn, and cut sharply the rate of withdrawal, from 63p to 55p for every additional pound earned. This addresses unfinished business, since a 55p rate was part of the original design, but Universal Credit actually increased the withdrawal rate for many compared to those on tax credits.

Focusing on this ‘taper’ rate gives greatest help to those on UC with the most earnings from work. Families with more working hours also gain more from the remarkably rapid increase in the National Living Wage, raising minimum hourly pay for people aged over 23 by nearly 50% since 2015. The 2016 increase to 85% in support for childcare fees for UC recipients also helps those with the most work, who require the most childcare hours.

The cumulative effect of policies that increase work incentives but let basic benefits wither has not been widely appreciated, partly because with a restructuring benefit system and families on low incomes experiencing different inflation rates than the average, it’s hard to chart this change very clearly.

But we do now have a long-term benchmark of needs that can help with such comparisons. Our team at Loughborough’s Centre for Research in Social Policy have been calculating the Minimum Income Standard (MIS), based on what members of the public think households need, on a consistent basis for over a decade. We can see some extremely stark contrasts between how near or far families of different types are from meeting their minimum needs now, compared with ten years ago.

The following graph shows for different cases what percentage of a minimum budget can be afforded out of the income of various families with children relying on Universal Credit, either because they’re out of work or they’re working on the minimum ‘National Living Wage’. It shows that for out-of-work families, there has been a serious erosion in the adequacy of incomes, falling from close to two thirds to barely half what families need. In contrast, a working couple with two jobs can now support a family at or above the minimum level, rather than falling 17% short of the MIS threshold in 2011 (when they were actually worse off than if one partner worked part-time, due to greater childcare costs).

This certainly increases work incentives: a couple family moving from unemployment to two full-time jobs nearly doubles their net income; in 2011 they raised it by just one-third. But it leaves out-of-work families struggling even more than they did in the past. (This is even more pronounced for a single person without children, for whom out-of-work benefits have fallen to only a third of MIS, while full-time work leaves them 13% short, compared to 25% in 2011.)

And importantly, most working families on UC do not have stable full-time jobs, and for those working relatively few hours, any gains from the Budget will at best be modest. Lone parents, in particular, typically work part-time; as the graph shows, they are much worse off than ten years ago, falling 20% short of MIS if they work half the time on the National Living Wage.

Thus, the focus on work incentives is weakening protection for the majority of families receiving Universal Credit, who are either out of work or do not work enough hours to gain a large amount from the Budget.

A striking feature of 2021 has been the breadth of the recognition of how inadequate Universal Credit is without the £1,000 uplift – in a consensus ranging from Iain Duncan Smith to Gordon Brown, but sadly not Mr Sunak. The key question is whether this new understanding during the pandemic will be maintained or forgotten in the years ahead. And if remembered, will there be a serious attempt by politicians to rebuild a social security system that protects us all adequately when things go wrong in our lives? If not, we are likely to see ever more parents acquiring unsustainable debt and being driven to food banks to feed their families.