Saturday, 24 November 2012

The main problem with universal credit

Universal credit is the government's planned replacement for several current benefits. It is due to replace them for new claimants in April 2013.

Income support, income-based JSA, income-related ESA, housing benefit, and tax credits will be merged into this single universal credit. Despite the name, many other benefits will remain, but the ones being merged share the common feature of being based on the claimant's household income.

However, there is one benefit that is also based on household income that is not being merged. That is council tax benefit.

Council tax benefit is going to be abolished in its present form, and replaced with local council tax support. This local support will almost certainly have its own income-based rules, with only the details being different locally.

At one stroke this decision virtually wipes out all of the claimed advantages that universal credit promises.

The reason is that universal credit itself will have a 65% taper. This means that for every £1 somebody earns in a week, they lose 65p of benefit that week. This model exists in all the currect income-based benefits, but the amount currently varies as follows:-

    • IS/JSA/ESA: 100%
    • Housing benefit: 65%
    • Tax credits: 41%
    • Council tax benefit: 20%
Where a claimant gets a combination of these, the interaction is complex and the total taper depends on whether one benefit counts as income for another or not. We don't need to worry too much about the details, but the outcome is these combined taper rates:-

    • IS/JSA/ESA + any other: 100%
    • HB + CTB: 85%
    • HB+CTB+tax credits: about 92%
So at first glance these current withdrawal rates seem to compare favourably to the single 65% proposed for universal credit.

But because council tax benefit is not being merged into universal credit, and because neither universal credit nor council tax benefit will count as income for each other, the future withdrawal rate will actually be 65% + x%, where x is whatever level is set by the local council. Given that local council have to cut their support below the current level of  CTB expenditure, it seems unlikely that x will be under 20 and could be higher.

So we will get:

    • Universal credit + local CTB: 85-90%
 We are immediately back to the same problem as before, solely because of this one awful decision on council tax. 

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