Why the Universal Credit Project Is a Mess

26/09/2012 21:54 BST | Updated 26/11/2012 10:12 GMT

Universal Credit will start being rolled out in a year's time. The plan was that all new applications for benefit would be for Universal Credit from October 2013. That commitment has now been dropped, and Universal Credit will be rolled out more gradually - details remain sketchy. But this delay is the least of the government's worries. As the roll out approaches, a host of serious problems is becoming clearer. The Universal Credit project is in a mess.

The decision to exclude Council Tax Benefit from Universal Credit has proved a disastrous misjudgment, as we warned at the time. This is not the fault of Iain Duncan Smith. He wanted Council Tax Benefit included. But under pressure from Communities Secretary Eric Pickles, the Prime Minister overruled him. As a result, the key potential benefits of Universal Credit, which we have always argued in favour of, will be severely undermined.

The government boasts that Universal Credit will strengthen work incentives by enabling people to keep more of their income from work. They say that hardly anyone will suffer a taper rate over 80% - that is, if they earn an extra pound, hardly anyone will lose 80p or more from withdrawn Universal Credit.

Unfortunately, this claim will not be true once the new localised arrangements for Council Tax Benefit are factored in. In a recent blog post, Paul Lewis, of the Radio 4 Moneybox programme, has calculated that: "In areas which raise the Council Tax Support taper to 25% householders on Universal Credit who pay tax will find that 82p of each pound earned disappears in deductions. In areas with a 30% taper they will lose 83p and keep just 17p for each pound earned... Losing more than 80% of each extra pound you earn is hardly an incentive to work or to work harder."

Keeping Council Tax Benefit separate also wrecks the simplification advantages of Universal Credit. UC was supposed to make it much easier to understand the income gains from getting in to work. Instead, they will depend on your local authority's Council Tax Benefit system. The straightforward, consistent picture we were promised has been lost.

Shabby treatment of self employed people will be another big problem. The Low Income Tax Reform Group of the Chartered Institute of Taxation has been warning about this for over a year, but ministers have ignored them. "The proposed treatment of the self-employed under UC will represent a massively retrograde step from current practice", they say in evidence to the Work and Pensions Select Committee. "The combination of the proposed system of accounting for profit and the minimum income floor will give a wholly distorted view of how the business is actually doing; the monthly reporting will add greatly to burdens on small business."

And the fundamental question of which recipients of Universal Credit will qualify for free school meals remains unresolved. In March last year, Mr Duncan Smith told MPs he expected to be able to clarify that by June 2011. Last week, all he could say about it was that he was discussing it with the education secretary. He appears to be planning an income test for free school meals - people whose household income is less than a threshold will qualify. But that would mean an impossible hurdle to getting into work or increasing their pay for people with an income just below the threshold - a far worse work disincentive than anything in the current system. Someone with three children who lost free school meals through getting a small pay rise would have to earn another £3000 per year before they were as well off as before the rise.

And there are lots of other problems. I haven't even mentioned the IT. The Social Market Foundation has just published research highlighting problems caused by the rigidity of the proposed new system. Many are worried by the assumption that applications will normally be made online. And the new system will be introduced just as the government's cuts to welfare advice funding are biting, so it's going to be very hard to find help when there are problems.

It is reported that the prime minister's unsuccessful attempt to move Iain Duncan Smith in his reshuffle was prompted by Treasury alarm about the prospects for Universal Credit. You can see why they are worried. A huge amount of work will have to be done to secure the trouble-free introduction of the new system we all want to see in October next year.