In a pre-Budget speech to the Joseph Rowntree Foundation this morning, Liberal Democrat Leader Vince Cable will call for a series of reforms to Universal Credit.
These include the reversal of cuts to the work allowance, worth around £3bn a year, and ending the benefits freeze a year early.
Vince Cable is expected to say:
"The problems stem from conflicting objectives: providing minimum family income; providing incentives to work; simplification; and saving money. Simplification, saving money and work incentives have taken precedence over the first, crucial, priority.
"Practical problems have been ignored creating real hardship, payment delays in the switchover, penalties for the self-employed; use of a single bank account for divided families; barriers to work from lack of childcare; monthly payments for those on weekly or casual wages; technical complexities in establishing online payment; and the use of Universal Credit to facilitate debt collection…
"[But] the fact that UC is becoming loathed and is being implemented incompetently and harshly does not invalidate the reasoning behind it. I strongly repudiate the Labour Party’s suggestion that Universal Credit should be scrapped without being clear what the replacement is: a classic case of soundbites taking precedence over thought-through policies ."
Full speech. Check against delivery.
JOSEPH ROWNTREE FOUNDATION
Thank you for inviting me to speak to the Foundation. I last did so in York three years ago when I was in the Cabinet at the end of the Coalition. York had particular significance for me since my father’s family came from Layerthorpe where Seebohm Rowntree did his original path braking survey work on poverty – and that side of the family worked for Rowntree’s (my mother’s were on the other side of the city working for Terry’s – my mother on the production line, packing chocolates). And it was Seebohm Rowntree’s work – first published in 1901 – which provided ammunition for the wave of liberal welfare reform in the 1906 government: the state pension and national insurance for health and unemployment benefit. And that in turn was part of the radical liberal tradition which led to Beveridge and Keynes and which my party identifies with today.
Today’s controversies over Universal Credit have focussed attention on growing poverty in working families (by contrast, there is still pensioner poverty but it has been largely eliminated by the welfare system; and there is still poverty amongst the unemployed, but their numbers have greatly shrunk). The medium wage in real teams is currently still lower than in 2008: 3% lower according to the IFS. The fall has been greater for younger workers: 5% for those in their 20s; 7% for those in their 30s.
There is much, politically charged, debate around this dire set of numbers, the worst for any decade since the Napoleonic era. No doubt government policy deserves some of the blame but the minimum wage, now rebranded the living wage, which government does control for the benefit for low paid workers, has been rising in real terms since 2014, and is now above 2008 levels (which means that differentials with average pay have been squeezed).
Essentially, the financial crisis and the damage wrought by the near-collapse of financial institutions has led to a period of very low productivity growth, leading to low wages; while technological and structural changes in the labour market have led to a growth in insecure employment with weak labour bargaining strength. There is some suggestion also of a rising share of profit, relative to wages, in corporate income.
What matters for living standards is how far low wage income is supplemented by in work benefits offset by taxation. Low paid as well as other workers have benefitted from rising tax thresholds but have been hit by curbs on in-work benefits and the further cuts to Universal Credit which occurred in the 2015 Conservative Summer Budget
Joseph Rowntree and other bodies using the same methodology calculate that there are currently 2.8m children and 2.6m working parents in poverty (defined in relative terms – that is less than 60% of the medium income). It is expected that 1 million more will be in poverty by 2020 on the same definition. The IFS calculate that the benefits freeze alone will result in an annual income reduction averaging £450 for 10 million households, while the Resolution Foundation estimate that cuts to Universal Credit will see working families with children losing £1,300 on average.
There is a separate argument about inequality which of course is not the same as poverty. There is a popular perception that inequality is also worsening. In one sense this is true. The rise of the global superrich, including British residents, fuels this narrative. But on the standard measure of income inequality, the Gini coefficient, there is little evidence of widening inequality since 2008 (the current figures of around 0.34 (or 0.38 after housing costs) have been stable, or fallen slightly, after the big jump from 0.25 in the 1980s with the Thatcher Government. The UK figure is higher than in most of Western Europe though lower than in the USA (much hinges on what is included in the measure). Sweden has, seemingly, one of the highest pre-tax/benefit level of income inequality but one of the lowest levels of post-tax/benefit inequality in Europe). There is also wealth inequality in the distribution of assets – which appears to have worsened.
There is an immediate question of how to address the clear evidence of poverty, and growing poverty, in working families; but there are bigger and deeper questions of how to design a new kind of benefit system, with ideas like universal basic income, and also questions around determinants of pay and job security.
The problems with Universal Credit have been well described by Frank Field, the Chair of the Work and Pensions Select Committee in ‘Wonderland visions of welfare reforms collapse on contact with real life’.
The problems stem from conflicting objectives: providing minimum family income; providing incentives to work; simplification; and saving money. Simplification, saving money and work incentives have taken precedence over the first, crucial, priority. Practical problems have been ignored creating real hardship, payment delays in the switchover, penalties for the self-employed; use of a single bank account for divided families; barriers to work from lack of childcare; monthly payments for those on weekly or casual wages; technical complexities in establishing online payment; and the use of Universal Credit to facilitate debt collection. Frank Field concludes that over and above any extra resources there have to be robust safeguards to prevent incomes falling; and much more flexibility.
But in scrapping the whole project in relation to UC there is a danger of throwing out the baby with the bathwater. The fact that UC is becoming loathed and is being implemented incompetently and harshly does not invalidate the reasoning behind it. I strongly repudiate the Labour Party’s suggestion that Universal Credit should be scrapped without being clear what the replacement is: a classic case of soundbites taking precedence over thought-through policies (at the risk of being too partisan, the problem is that Messrs Corbyn and McDonnell are giving spending priority to subsidising well paid university graduates over people in poverty, which may be politically smart but isn’t socially progressive).
It makes a lot of sense to combine benefits to get rid of the complexity and perverse incentives, in particular the disincentive to work under current arrangements. The OECD has acknowledged the force of these arguments. Unfortunately, UC is being undermined by the problems I have summarised above, by the sanctions and testing regime built around it; by faulty IT; by unjustifiably long waiting times; and, above all, the way in which the Treasury has used its introduction to cut large sums, perhaps £5bn, from the benefits system.
There are three specific changes my party are arguing for in financial terms over and above the reforms in the way UC operates:
· A reversal of the cuts to the work allowance worth around £3bn a year, which JRF analysis suggests would boost the budgets of 9.6 million parents and children, 4.9 million of them in working poverty, and take 300,000 people out of poverty
· Improvements to Universal Credit for the 800,000 self-employed who will eventually claim the benefit: by extending the period before the “minimum income floor” cap kicks in from 12 to 24 months; and averaging income over several months so that people are not penalised for fluctuating incomes (all at a cost of around £400m)
· Ending the benefits freeze a year early so that benefits are inflation proofed again (at an estimated annual cost of £1.6bn in 2019/20)
The overall cost is around £5bn and we have suggested how this can be funded by returning the corporation tax rate to 20% and by taxing wealth more fairly (by making pension tax relief more progressive, and taxing unearned gifts and capital gains more like income). There is a wide range of revenue possibilities if there were the political will to address the problem of funding UC properly. The Government must pause the roll-out of Universal Credit and urgently review both its design flaws and lack of funding.
Dissatisfaction with the operation of UC is fuelling the demand for alternatives like Universal Basic Income. But these suffer from precisely the same problem: that their acceptability is likely to depend on the availability of funding. In practice, with a Treasury constantly seeking savings, the Universal Basic Income is more likely to resemble the model of minimalist support set out by Milton Friedman and Amy Rand than the more generous vision of super UBI by utopian reformers on the progressive Left.
The idea of a universal guaranteed income could at least, in principle, simplify the welfare system with less means testing (at the cost of ignoring tricky problems like housing benefit); could promote non-monetary employment (like caring for dependent relatives and children); and makes it easier for workers to reject low paid employment (at the expense of weakening the incentive to work). The real problem is the financial constraints: limited amounts of finance are being used to subsidise the less needy, meaning less for the genuinely needy. Like all simple solutions to complex problems, universal income is attractive as an idea but quickly runs into a host of practical problems.
Reforming the welfare system, however done, begs the question of how to raise the economy’s productive potential and hence wages, and how to ensure that growing numbers have access to the education and training required to maximise opportunities for remunerative, relatively secure, employment. I have set up a Commission on Lifelong Learning to advise how education and training can best be supported and financed so that people escape low pay over their careers; and overall economic performance and rising pay, underpinned by a strong minimum wage, is what will lift the working poor out of poverty. But there will still remain vulnerable people hit by hard times, disability or caring responsibilities, which is why we need a robust safety net fit for the 21st century There won’t be an end to the poverty debate any time soon.