'The government must take a step back on universal credit.'
As criticism of universal credit continues to grow, Sam Lister says ministers must not fall into the trap of seeing major issues with the policy as minor glitches.
Universal credit is a product of behavioural economics: the belief that incentives change behaviour and that these can be engineered by redesigning the benefits system.
The starting point is a feature of the benefits system known as the poverty trap that undermines work incentives in much the same way as high rates of tax do. The poverty trap arises because benefits are withdrawn proportionately as earnings rise and the rate of that withdrawal is known as the taper. The steeper the taper the deeper the trap – whereby large increases in earnings result in only relatively small net income gains in income – so that work barely pays more than benefit.
The solution: redesign the benefits system with less punitive withdrawals and the unemployed will return to work. And, since the steepest withdrawal rates occur across the range of incomes where several benefits overlap and are withdrawn concurrently, combining them all into a single payment eliminates the deepest part of the trap.
In universal credit this faith in better design is also applied to problems of administration. Human error inherent in decision making would be overcome by a new computer system in which the decisions are largely taken by a software programme that applies the rules consistently. The failure of earlier large government IT projects would be avoided by building in small slices using a design, build and test process known as ‘Agile’.
Sounds good so far doesn’t it? So how could it have gone so badly wrong?
The answer is that poverty is far too complex to be reduced to simple behavioural economics. That’s not to say the analysis is completely wrong: the poverty trap is a problem, but it’s not the only cause. In reality structural causes are far more significant: no amount of tinkering with the taper will hold back the tide of unemployment at the start of an economic downturn.
Universal credit does ease the poverty trap and improve work incentives. But the introduction of tax credits had already largely achieved this with only a tiny proportion (around 2%) of claimants caught in a deep trap. And universal credit claimants experience marginal gains of around £3 for each extra £100 earned compared with those on legacy benefits. It seems pretty unlikely that such modest gains will transform return to work rates in the way that ministers claim.
There’s also an element of throwing the baby out with the bathwater here. Rolling several benefits into a single payment seems logical and sensible, but welfare benefits are complex and combining six sets of rules into one makes for an excruciatingly complicated benefit. Organising benefits by function has the advantage that each component is easier to decide and pay than if all the elements are combined. Mistakes are easier to identify and at any given point there is a greater chance that at least one benefit is in payment. Conversely with universal credit nothing is decided or paid until everything is decided: and its complexity means there is a lot to decide. The result is predictable: a cash flow crisis for claimants that is relatively rare for the legacy benefits that universal credit replaces.
The extent to which the administrative process could be automated was also overestimated (no doubt with an eye on efficiency savings). Computers are good at applying rules, making calculations and storing the results. However, these processes cause little difficulty in the current system and have never been problematic for even the earliest computers. The difficult tasks in administration are decisions that require judgement or discretion which cannot be automated and these have, if anything, increased under universal credit.
Finally combining six benefits into one involves the Department for Work and Pensions taking over administrative tasks that were previously done by other agencies, and therefore have little expertise in. Unsurprisingly these tasks are the also ones which are the most time-consuming and difficult to administer: collecting information on rents and service charges, calculating net earnings, assessing childcare costs from locally based providers. These are all new to the DWP meaning that mistakes are much more likely.
Like the poll tax before it, universal credit has become the Emperor’s new clothes. But unlike the poll tax the advantages claimed by ministers at least have some merit, they are just grossly overstated.
Ministers have fallen into the trap of believing their own propaganda with the result that the recurring problems raised by claimants are viewed as little more than teething problems, mere administrative glitches that can be solved by the odd tweak here and there.
The reality is that these problems arise from structural features of universal credit itself. Admitting this is not weakness but a pre-condition for understanding what is going wrong. Until that time it seems unlikely that the fundamental changes that are necessary to end the widespread misery and hardship experienced by claimants will be put in place.
Sam Lister is policy and practice officer at the Chartered Institute of Housing.