The impact of Universal Credit
Iain Duncan Smith’s aim is worthwhile; to simplify the benefits systems, incentivise work and promote personal responsibility and financial resilience amongst benefits recipients. Universal Credit will arrive in 2013 with this in mind. It will replace many existing benefits: income-based Jobseeker’s Allowance, income-related Employment and Support Allowance, Income Support, Child Tax Credits, Working Tax Credits and Housing Benefit.
If the policy is to be a success, it will be essential to understand the lives of the people it will affect. The challenges that households on low incomes face are very different to those on higher earnings, and it should not be assumed that restructuring the system alone would deliver the change in attitudes and behaviours the Government wants. This is clearly articulated in recent research undertaken by Ipsos MORI for the Social Market Foundation (SMF).
What was apparent from conducting the research was that running a household on a limited income is a very difficult job, and that it is a myth that people on low incomes are poor budgeters – they are usually better than most at managing their money because they don’t have the luxury not to. To avoid real hardship, daily efforts and routines are needed to source the cheapest goods, anticipate spending needs and make delicately balanced decisions about where money should go. Apportioning of income and payments is usually a central part of the best strategies, as it reduces the risk of over-expenditure and offers confidence about how much money is available for discretionary spending. Benefit payments that are regular help this process because they have a natural rationing and restraining effect. In addition, because payments are never more than a few days away, there is less risk of a serious shortfall.
The consequences of missing payment deadlines or living beyond your means can be severe and self-perpetuating. Low-income families struggle to find financial stability, as any small shock to their income – such as a late payment fee - has a severe impact. Many are excluded from mainstream financial services, and borrowing can become routine often through the alternative credit market: pawnbrokers, retail credit and payday loans.
The research also highlighted how many families were living with substantial debts accrued during more prosperous times, and how, in the current economic conditions, Britain’s older generation are actively subsidising their children and grandchildren: nearly all families who took part in the study were getting financial help from their parents in the form of regular loans and gifts. Although assistance from family members often provides reassurance, the emotional impact of this help is that it can cause stress, guilt and changes how family members relate to each other.
This is the context in which Universal Credit is being introduced and it was felt quite strongly by those that will be affected that a single benefit payment will compel families to do more of the necessary apportioning and rationing themselves. Families who are already operating an effective system felt comfortable that they could do this.
However, families without a system in place may struggle, principally because longer payment periods (monthly for Universal Credit) do not lend themselves to day-to-day/ad hoc financial management, and these families were the most daunted and concerned about the changes and their ability to adapt. Similarly, from our survey work amongst benefit and tax credit recipients for DWP we know a fair proportion of claimants will struggle (a third of claimants currently run out of money before the end of the week or month, always or most of the time, and a further third run out of money more often than not or sometimes).
The research for SMF also found little belief among claimants that the proposed changes would be hugely beneficial. Some agreed that combining payments might be simpler, and proposals to make tax credit payments more responsive to changes in circumstances were generally well received.
However, the move to give people greater responsibility over overall budgets was largely unwelcomed, principally because of: a) the greater burden it would place on people who already struggle to manage on top of other constraints on their time and competing priorities; and b) the considerable extra risk of failure. The sense from the research was that perceived benefits in terms of improving household budgeting are possibly illusory - because most families are already managing as well as they can with very limited incomes, and those that aren’t are more likely to be harmed than helped by being forced to take on greater challenges.
Of course, it is impossible to predict exactly what will happen from our hypothetical discussions. It certainly seems that many families will adjust, and some may find advantages in the new arrangements, but the risks posed to other families is troubling. Identifying and supporting those families is an important priority. Many were also keen to have a degree of choice or flexibility around the new arrangements, which may also help to create the feeling that they are participating in the changes rather than merely being on the receiving end of them.