Winners Of The Next Election Will Govern Universal Credit Britain - With Working Renters Winning Out From The Reform, While Those With Disabilities Face Major Income Losses

15th April 2024

Universal Credit (UC) is on track to be fully rolled-out to seven million families by the end of the next parliament, with working renters the main winners. Those with disabilities the main losers from the reform as it faces up to new challenges like rising long-term sickness, according to new Resolution Foundation research published today (Monday 15 April 2024).

With the final phase of the UC roll-out now under way, and neither of the main parties pledging to overhaul the reform, the report In Credit? says that whoever wins the next election will govern a fully rolled-out ‘Universal Credit Britain'. However, both the benefit system and the country have changed considerably since the introduction of UC in 2013.

The fifteen-year roll-out has been characterised by prolonged welfare cuts. By 2028, entitlements to UC will total around £86 billion a year, but this is £14 billion less than if the government had kept the 2013-14 benefit system. As a result, seven-in-ten working-age families eligible for means-tested benefit support will be worse off under ‘Universal Credit Britain' than with the pre-reform system.

However, most of these cuts have occurred across the entire working-age benefit system, rather than being unique to UC. The report notes that the impact of UC in isolation is more nuanced, saving £4 billion compared to the legacy system (with an average loss of £350 for eligible families), and creating a mix of winners and losers. This reflects the different priorities of the welfare reform, as well as the inevitable consequences of rolling six complex benefits into one.

The research finds that the biggest beneficiaries from the switch to UC are working families in rented accommodation. A renting single parent who works 30 hours per week on the National Living Wage will be nearly £3,800 per year better off in 2024-25 than if they were on the old system. Across the 2.7 million families in the private rental sector that are eligible for UC, the average gain compared to the old system is £1,200.

However, the report also shows that the streamlining of disability premiums means that out-of-work claimants with disabilities are likely to be worse off under UC. For example, a single person with a long-term disability that prevents them from working will now be £2,800 per year worse off.

As well as simplifying the benefit system, UC was designed to ‘make work pay' through a mix of ‘carrots and sticks'. The report shows it has done this by virtually eliminating the very high marginal deduction rates of the old system - the number of claimants losing over 70p of every extra pound they earned has fallen from 1.4 million to just 165,000. Conditionality also plays a bigger role, with 2.7 million UC claimants subject to some form of conditionality, compared to 1.1 million in the legacy system back in 2013-14.

But although ‘making work pay' may have been the right focus for the problems of high unemployment and worklessness in the early 2010s, Britain today faces different labour market challenges.

While the unemployment rate has fallen from 8.5 per cent in 2011 to just 3.8 per cent in 2023, and there are currently only 35,000 workless couples with children where at least one parent is unemployed, economic inactivity due to poor health is at near-record levels.

The report notes that the number of benefit claimants who are out of work because of ill-health has almost doubled since UC was first introduced to reach 2.3 million now.

The Government has recently announced long-run changes to UC that should encourage people with ill-health to seek work. The report says that whoever wins the next election will need to build on these plans, while recognising that Universal Credit cannot by itself tackle Britain's growing sickness problems.

Alex Clegg, Economist at the Resolution Foundation, said, "Whoever wins the next election will be governing a ‘Universal Credit Britain’, with seven million families eventually receiving the new benefit. It is vital that they understand both the system they will inherit and the population that relies on its support.

"A lot has changed since Universal Credit was first introduced back in 2013. The working-age benefit system is less generous, with entitlement down by £14 billion. The reform was designed to meet the 2010s’ problem of high unemployment, but Britain in the 2020s faces new challenges from an older and sicker population.

"Compared to the old system, Universal Credit offers greater support for renters and stronger incentives to enter work. But its original design did not anticipate there being over two million claimants with poor health or disabilities. Alongside efforts from the NHS, education, and labour market policy to address the drivers of ill-health, UC will need to change to tackle Britain’s new challenge of long-term sickness."

With neither of the main parties wanting to scrap Universal Credit, whoever wins the election will be governing a ‘Universal Credit Britain’, as the final stage of what has been the biggest benefit reform in a generation is due to end with a system covering 7 million families by 2029. But it is nearly 14 years since Universal Credit was first proposed, and both Universal Credit and the country have seen big changes since then. This note assesses how the current Universal Credit system compares to the legacy benefit system it is replacing, and how changes in the country over the last decade have altered its impact.

Key findings
Seven-in-ten (71 per cent) of the 9.8 million families who are eligible for either Universal Credit or legacy benefits are worse off in real terms on Universal Credit in 2024-25 than they would have been under the legacy system in 2013-14, with an average difference among all eligible families of -£1,400 per year. But this is largely due to cuts in overall levels of working-age support, rather than the design of Universal Credit.

The impact of the Universal Credit reform in isolation is more nuanced, with a complex mix of winners and losers compared to the legacy benefits system. Working renters are the biggest winners, on average, and disabled people are among the biggest losers, from the reform, especially single people with a disability that prevents them from working - i.e. those who would previously have been in the Employment and Support Allowance (ESA) support group and in receipt of Personal Independence Payment (PIP) - and do not have a full-time carer. But the Universal Credit reform still represents a net saving for the Exchequer compared to legacy benefits. The total modelled cost of Universal Credit at full roll-out and full take-up, at £85 billion per year in 2024-25, represents a significant saving over both the legacy system in 2013-14 (£100 billion in current prices) and the legacy system in 2024-25 (£90 billion).

A couple with two children paying rent at the average Local Housing Allowance on a two-bedroom property will be entitled to Universal Credit up to gross annual earnings of £67,000 in 2024-25, compared to £42,000 for legacy benefits. This gap between where entitlement to Universal Credit and legacy benefits run out is the largest it has ever been, following cuts in the rate at which Universal Credit is withdrawn in 2017 and 2021.

Universal Credit’s higher support for working renters and lower support for disabled people will eventually contribute to a £2.1 billion shift in benefit entitlement towards London and the South East and away from the rest of the country, compared to a world where the regional breakdown of spending remained as it was under legacy benefits. The proportion of expenditure on Universal Credit and working-age legacy benefits that goes to London and the South East increased from 28 per cent in 2017-18 to 31 per cent in 2022-23.

Universal Credit has reduced the number of people facing very weak incentives to work and earn more, but at the cost of having more people facing what would still be thought of as weak incentives. The proportion of workers facing marginal deduction rates of above 70 per cent from 1.4 million to just 165,000, but the number of workers with MDRs above 50 per cent has risen from 3.7 million to 4.3 million. It has also tended to weaken incentives to work for second earners in couples: median participation tax rates (the total proportion of gross earnings lost to tax and benefit withdrawal) are 14 percentage points higher for second earners on Universal Credit than legacy benefits.

Universal Credit has extended conditionality by absorbing some legacy benefits which never had conditionality, and extended it to some families where people are in work. As a result, there are now 2.7 million people on Universal Credit subject to some form of conditionality - including 840,000 in work - compared to 1.1 million out-of-work Jobseekers Allowance (JSA) claimants in 2013-14.
There is clear evidence that unemployed single people and lone parents claiming Universal Credit move into work more quickly than those on JSA, although the overall impact of Universal Credit is not clear (and may well never be known).

There has been a steep rise in the number of Universal Credit claimants who are unable to work due to ill-health or disability. In April 2013, there were 1.2 million families claiming ESA, but, mirroring the more general rise in the number of people claiming disability benefits, there are now 2.3 million families claiming either ESA or the equivalent elements of Universal Credit. As a result, the proportion of the total Universal Credit caseload subject to conditionality rules has fallen from 65 per cent in April 2019 to 44 per cent in November 2023.

Policy makers must figure out how to adapt Universal Credit to address the labour market challenges of the 2020s, recognising that the system is operating in a different country from the one that was foreseen when Universal Credit was announced: one that is older and sicker, and where the stereotype of younger people making choices not to work is no longer pertinent. The Government has announced reforms to the test for ill-health in Universal Credit, but policy makers should not assume that Universal Credit alone can shoulder the burden of dealing with the UK’s challenge of rising inactivity through ill-health. We must not use thinking from the late 2000s to drive policy decisions in the late 2020s.

Read the full report HERE
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